Last week I started writing about Dave Ramsey's book EntreLeadership and this week I'll dish out some more Ramsey wisdom. The second half of the book was just as good or better than the first half. It's few and far between to find a leadership book with 300+ pages that can keep it's momentum and not get repetitive.
This week had some great content, but it true Ramsey style, I'll talk about money this week. Ramsey talks about start-up finances and compensation for employees.
As far as starting a business, Ramsey contends that there is no reason to take out debt to get it off the ground. According to the Bureau of Census's data, 60% of businesses opened within a given year require less than $5000 to get started. You don't need brand new equipment or a fancy new building. There are two aspects to profit, revenue and expenses, so why shouldn't you attempt to decrease expenses in the start-up of your new venture? How often do you hear about businesses that are now trading of the stock exchange that started in someone's garage? Starting slow and minimizing your scale early makes the mistakes you make early on small enough you can recover easily. If you are up to your neck in debt with a new mortgage and loaned out equipment, the first botched order or clerical mistake might cost you the whole business. It's important to have controlled scaling when starting a brand new business. And the easiest way to control scale is to start small.
Even large items don't have to require you to assume debt. Ramsey has a philosophy to rent until you can afford to pay with cash. If you are renting a large piece of equipment, it doesn't control your business. However, if you buy a $50,000 piece of machinery but the orders for that specific product dry up, you incur the costs of you debt with no revenue to show profit. If your orders are dried up long enough, depending on how small you business is, that piece of equipment's payments will soon break you. Or if you sell the piece of equipment, and you are likely not able to get out of it what you paid for it and end up taking a huge loss. I think it's a lot less risky to avoid taking out loans, especially large loans. Don't start a business and let your debt situation control your business decisions. It kind of defeats the goals of being an entrepreneur.
Dave also talks about compensation and I like his approach. He wants everyone in the company to have a entrepreneurial spirit that works for him. And to make that happen, each person has to have something to gain from the success of the company. That is why everyone in his company works off commission or gets some form of profit sharing. Even if there is salary tied in with the commission or profit-sharing, the person is still inclined to perform better. This also weeds out ineffective people very well too. If they can't perform then they don't make very much money and leave. Ramsey said he would make his receptionists commission based if he could figure out a way. The thing you want to avoid is having an entitlement mentality within an organization and if someone is solely salary based then they start to expect their pay. Not their fault, they are a product of their organization. If someone gets a bonus or compensation or profit share, they are involved and their performance can directly affect the pay they get, so they are more inclined to work harder if they want more money.
I think if you are starting up a new venture, having someone commission based it huge. It limits costs and generally people that are willing to come to a start-up and accept a commission based salary have an entrepreneurial spirit which is exactly what you need.
EntreLeadership is a fantastic book and I think if you are a Dave Ramsey type of person it could easily be your handbook to starting a new company. I encourage you to pick up this book, it's a winner.