Questions to ask before a start up: A real story to Understand

Coffee shop story

As I was sipping coffee at Maria’s cafe I asked her the following questions. The First Question was:

 Maria what was your intention before taking over the cafe? Maria said – I was fed up working 9:00 AM to 5:00 PM. I wanted to be my own Boss. I wanted to run this cafe so profitably so that I can sell it to a potential buyer in 3 to 5 years. With that money I could start another business. Well that is a good intention. But I will not say anything now.

I asked the second Question – What were you doing before starting this business Maria?  She said – I was working as a HR manager for a multi-national company. It was a 9:00 AM to 5:00 PM Monday to Friday job. Then I asked her – How much were you earning as a HT manager?  She said, Oh my package was $80,000 per year.

Then I asked – Maria how much time do you spend in your business as of now? She said, that from the day I started I usually come to my cafe at 6:00 AM in the morning. This is because the cafe has to be opened at 7:00 AM as the customers start walking in at 7:00 AM. We are open till 3:30 PM and sometimes till 4:00 PM. I spent another hour winding up. So by 4:30 PM to 5:00 PM I usually finish everything. Then I lock the door. Then I asked her is it safe to say that you work from 6:00 AM to 5:00 PM every day. Not every day she said, we are not open on Saturdays and Sundays because we operate in CBD (Melbourne) and most of the offices are closed on weekends. Majority of our customers are working professionals, so we remain closed on Saturdays and Sundays.

I asked her – Does your landlord not charge you because you are not open?  She said, come on don’t be so stupid. Of course I have to pay for every day whether I am open or not. I said I was curious to know whether your landlord was not charging rent for not opening.

Next question was – Maria how much did you make in business last year?  She said, I have been really smart. I said yes you told me once and what makes you think you are smart once again. She said, I pay myself in this particular business. I treat myself as an employee and every hour I make sure it is added in the accounts section. The salaries are paid on hourly basis. I said OK Maria but my question was how much did you make in business last year?  She said,  I do not have any business partners. I am whole and sole in the business so any profit made is all mine. Everything belongs to me. I said, that is good to know Maria but you still have not answered my question. .How much did you make in business last year?  She then said you know what when I go spending… I said OK Maria let’s stop here. Did you file your taxes last year?  She said yes. I said, in that particular document, the one your accountant made while filing taxes in one of the pages there must be a figure “Earning for that particular financial Year”. Have you seen that? She said yes.

What was the number? She said $33,000. So I said Maria two years before you were working 9:00 AM to 5:00 PM Monday to Friday and getting paid $80,000. You said No to that particular option. You quit your job and decided to start a business. That means you believed that you had the potential to earn more than $80,000. But here you are working Monday to Friday just like in your job, but you are not working from 9:00 AM to 5:00 PM but from 6:00 AM to 5:00 PM i.e. 11 hours and you made $33,000. I said Wow how smart you are!

I said Maria in business it is very clear. Either you are making profit or Loss it is all in black and white. It is my responsibility to make sure that my clients first understand whether they are making profit or not.

Let me tell you something about the money your father gave you. Do you know how much money that $250,000 could have earned itself if you had not invested in business? Do you know how much the $250,000 earned if you had kept it in a bank? It would have earned itself anywhere between 3 to 5%. If you had invested the same money in mutual funds it would have earned probably 8 to 10%. I f the same money was invested in private equity it would have earned anywhere between 12 to 15%. If you knew how to play in the share market then return would have been anywhere between 18 to 20%.

What I am trying to tell you is just by sitting in your bedroom and spending few hours in week, the $250,000 would have earned 20%. But you have ruled out all those options and started a business. First you have taken the risk and you are spending 10 to 11 hours for every single day for 5 days in a week. It also has the effect of regular headaches and body ache and stress. You are making just $33,000 every year for all that effort and risk!

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Questions to ask before a start up: A real story to Understand