Should I Start a Small Business?

Dear Accounting Professor:

I am contemplating starting a small business in 2023. What are your thoughts on this topic?

Future Business Owner

Dear Future Business Owner,

Thank you for your inquiry. It is always best to do your research before undertaking any significant activity.

I think the experience of operating a small business is useful for everyone. I think everyone currently in or aspiring to be in the workforce should have this experience as it helps them gain a better understanding of how businesses work and the kinds of decisions that management of any organization has to make. This experience provides career clarification by helping those (who are undecided about their career options) determine if they want to be an employee in a non-management role or be an entrepreneur or pursue leadership roles as an employee.

A Brief Contrast Between Small and Large Businesses

Small businesses have the potential to provide personalized interactions with their clients or customers. Large businesses often lose the ability to provide personalized interactions because of their size and organizational complexity. Small businesses also have the ability to disrupt the business models of larger competitors because those larger firms have adopted an perspective that they are irreplaceable in the eyes of their customers.

From a regulatory perspective, small businesses are much more friendly to a local community than a large business because a small business provides services that are tied to the local community and encourages its business activities to stay in that community's area.

With the rise of large business models that tap into economies of scale, can a small business be successful? Obviously, there are certain industries that make it near impossible for a small business to survive (utility service providers is one example). There are also regulatory issues that have eliminated certain business opportunities (e.g. telemarketing). Aside from those types of situations, it is absolutely possible to make a small business very successful.

In order to have a successful small business, I think patience and effort are probably the two most important aspects of creating a successful small business. Small businesses often fail because of impatience, laziness, and poor decision-making on the part of their owners.

Impatience: Anyone who begins a small business needs to be prepared for that small business to take at least 10 years of daily effort and financial support before it becomes self-sustaining. This means that a business owner needs to keep their day jobs while supporting and building their business or they need a lot of funds in savings to finance that business venture and their lifestyles while their business is developing. For example, a small business owner started a restaurant. Unlike most restaurants, his business was properly capitalized and turned a profit during its first year of operation. He closed his restaurant after three increasingly profitable years (and did not sell it) because he perceived that he did not make enough profit each year. Unlike most small businesses, his business was not under funded and its third-year profits were enough to support his family. He simply was impatient despite having entered and experienced early success in an industry that is notorious for business failures.

Laziness: Being a small business owner is not a 9-5 job with weekends and holidays off. It is a 24/7 responsibility that can demand attention at any time. As a small business grows, its owner needs to spend time doing multiple roles until that business gets to the point of being able to support the hiring of one or more employees to share the workload. During the normal business hours, a business owner is dedicated to interacting with customers and vendors (e.g. buying inventory). Outside of those normal business hours, that same business owner is now dedicated to administrative tasks (e.g. bookkeeping, regulatory paperwork including tax returns, etc.) and planning and preparing for the next phase of business growth.

Poor decision-making: Sometimes, business owners get bad advice from their support network. For example, an accountant or lawyer might recommend that a sole proprietor incorporate when that business is not large enough to sustain the regulatory burden of a corporation. I view advice like that as being predatory and certainly not in the best interest of their clients. (The liability protection argument does not pass the smell test because that sole proprietor still retains liability because of that person's involvement with management decisions and daily operations.) In other words, such a recommendation early in the development of a small business is opportunistic and results in increasing revenue for the professional making such a recommendation. Other times, they have unrealistic expectations that results in poor decision-making. For example, about three years after I first started working in the tax profession as a small business, another person thought that they could compete with me in our community and incorporated her tax return preparation business. Her business failed within two years because she did not understand her target market (we lived in a rural area; livestock and wild animals do not file income tax returns) and the regulatory requirements for a corporation made her business structure in that location unsustainable.