Do you know the golden rule of starting a new business? Repeated over and over again by entrepreneurs, and passed from one generation to the next, this rule is well summed-up by the Houston Chronicle:
A rule of thumb for an entrepreneur says that in the first year of running his own business successfully, he will make less than his prior salary, as most of his profits will be reinvested in the business. In the second year, he can draw his regular salary. In the third and subsequent years, he can draw a larger salary–plus any proceeds from his ownership of the company if he sells shares or outright ownership. The actual time frame to company profitability is entirely dependent upon how much start-up capital is needed to create the products and services, and how much money is drawn from the company for compensation and investor servicing.
Most entrepreneurs are told not to expect a profit for at least two years after starting a company. While this may seem a little extreme, the numbers don’t lie. That’s why I don’t advocate startups for most of my students.
You see, I don’t want you to have to wait years and years to see the results of your smart investing. I also don’t want you to spend hours and hours building a business that might not be your passion. Instead, I want you to see positive cash flow starting the first month you own a business, and I want you to fill your days doing what you love.
For most people, that means staying away from startups.