Entrepreneurs’ Economics: Key Lessons From YP Entrepreneurs
The draw toward entrepreneurship is clear: The opportunity to control your own destiny, reach your full potential, and reap large profits all while doing what you enjoy sounds pretty good, right?
The oil and gas industry is a veritable breeding ground for those who want to make this dream a reality. However, this dream cannot be achieved without a significant amount of personal risk and hard work
YPs Can Be Entrepreneurs
According to the Global Entrepreneurship Monitor’s 2011 and 2012 reports, there has been a dramatic increase in startup businesses in many countries throughout the world. Given a sympathetic underlying government policy and public support, entrepreneurship is a real possibility in many aspirant YP entrepreneurs’ career roadmaps.
Since its beginnings in the mid-1800s, the capital-intensive oil and gas industry has borne witness to many visionaries who overcame myriad obstacles to set up successful businesses. Most lessons they learned apply to those who want to take advantage of opportunities and test their self-belief, creativity, and determination to do something for which they have a passion.
What Matters Most?
Starting a business is constrained, more than anything else, by financial considerations. Among these are financial readiness to fund the project, access to capital funding from the market, and the risk of departing from monthly inflows. Each year thousands of potentially successful businesses fail because of poor financial management. Entrepreneurs especially must be realistic about funding.
Getting a bank loan can be a challenge for a startup company, so most entrepreneurs need to cover costs by putting up a significant portion of their own savings, or charging their credit cards. The graphical representation (Fig. 1) illustrates a typical life cycle of a startup and the relevant capital sources at each stage to meet the growing business’s financial needs.
The most important aspect of starting a business is, therefore, estimating its financial needs. A startup will need enough funds to survive until it turns a profit. Many sources recommend securing approximately 6 months’ to a year’s worth of projected expenditures in order to start a business.
Estimating how much that is can be difficult, but it must be done. This involves developing a complete, well-thought-through business plan. Because most new businesses require significant personal financial commitment, taking the time to create a business plan is of utmost importance.
A business plan is a document delineating the viability of your business and that it can make money. It summarizes all aspects of the business venture, including analysis supporting the rationale for its existence, and its financial, operational, and marketing strategies.
A business plan ultimately sells your business, and proves you have thought through exactly why and how it will run. This is very important for attracting financial backers, potential clients who will pay for your service or product, and well-qualified employees enthusiastic to work for you.
Essential to a Business Plan
An essential part of a business plan’s financial strategy is a financial management plan. Your financial management plan should include an estimated cash flow statement, income statement, and balance sheet. A cash flow statement shows how funds flow into and out from your business over a certain period (typically monthly or quarterly). This statement helps project when and under what circumstances the business’s breakeven point could be reached.
Your projected income (or profit-and-loss) statement estimates the results of your business from an accounting point of view over a specific period of time (typically quarterly or annually). It is used to make a case for your business’s potential to generate income.
A balance sheet is a status report of a company’s financial condition at a specific point in time. While not particularly useful for startup businesses, it is usually required by lenders and investors.
However, it is important and required for a startup’s business plan to include a personal balance sheet that gives a snapshot of personal assets and liabilities.
Like all businesses, a startup’s viability revolves around money.
Risk. As mentioned earlier, most financial risk is on a personal level. You may not be willing to risk your own personal finances, because, if the venture fails, your savings are essentially lost.
You may also be required to assume personal financial obligations exceeding your personal net worth, and thus expose yourself to bankruptcy.
To take that amount of personal risk, you must be truly passionate about the business you are starting.
Passion. Passion is important, because you must also be satisfied with a lower quality of life until the business gets established. Long hours and groundwork needed to launch a business can be staggering. Especially if you are risking your own personal savings, you have to be willing to cut back on your personal life to keep your business afloat until it turns a profit.
According to Randall Collum Jr., managing director of supply analytics at Genscape, a global provider of fundamental energy data and analytics, “You have to have an idea that you believe strongly in and then you have to be willing to put forth the effort to develop that idea. Ambition is the key, along with the drive that comes with it. When you’re starting your venture—working 7 days a week, 20 hours a day, it’s that ambition and drive and belief you will be successful that keeps you going.”
Collum was formerly the founder and chief executive officer of Spring Rock Production, a North American oil and gas production forecasting company that was acquired by Genscape in April 2012.
Work. Another misconception about starting your own business involves the level of work and effort to keep it going. Many businesses that get off the ground ultimately fail because the entrepreneur is more enthralled by starting up a business than by keeping it running—lacking the drive to continue until it makes money—and sustain it thereafter.
Taxes. Do not overlook the need to pay taxes. No matter what country you live in, taxes on small businesses exist. For example, in the US, small-business owners must get a tax identification number, then pay quarterly taxes. The taxes also need to be accounted for.
Legal Structure. Do the research to determine what type of legal structure is best for your business and register it as such with the various government entities you will need to contact.
There are several steps involved. The US Small Business Administration has a helpful article, titled “How to Register Your Small Business in Five Easy Steps,” on its website (www.sba.gov).
There are many types of legal structure, and in the United States, many entrepreneurships start out as a sole proprietorship, in which one individual owns and runs the business, and there is no legal distinction between the owner and the business.
But depending on your business plan, you may want to expand to form a type of corporation. For example, a C corporation is a corporation that, under United States federal income tax law, is taxed separately from its owners; an S corporation is a corporation whose shareholders are subject to tax on income based on their shareholdings; and a limited-liability company (LLC) is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
Networking. Do not underestimate the power of networking.
Genscape’s Collum says, “[The best way for entrepreneurs to manage their finances is] networking, networking, networking. My funding source was someone I had met 5 years earlier and just stayed in contact with. I never expected to have that person fund the business, and it wasn’t until I told him my idea that he offered to put up the startup funding.”
Randall Collum Jr. is managing director of supply analytics at Genscape, Inc., a global provider of fundamental energy data and analytics. He formerly served as founder and chief executive officer of Spring Rock Production, LLC, a North American oil and gas production forecasting company, acquired by Genscape in April 2012. Before starting Spring Rock, Collum was at Merrill Lynch Commodities Inc. (MLCI) for 5 years, where he was vice president, strategic analysis. For more than 5 years prior to joining MLCI, he worked at BP, where he served in BP’s North American Strategy group and in the Gulf of Mexico asset. Collum earned a BS in chemical engineering and an MS in petroleum engineering from the University of Houston, and a certificate in finance and accounting from Rice University. He is a registered professional engineer in Texas.
Genscape Inc. is the originator of real-time power supply information for energy market participants. It was founded in 2000 in the US and expanded to the European market in 2004. Today, Genscape is part of Daily Mail and General Trust’s USD-2.2-billion portfolio of digital, information, media, and events businesses.
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