Starting out on your own can be an exciting process. So much energy and ideas start floating about and your focus should be on hitting the ground running and earning some cash fast. Some entrepreneurs may be working a typical 9 – 5 while they launch their own business and have a lot of planning to get out of the way before they open the doors.
One decision to make may be whether to open a business or a practice. What’s the difference, why choose one over the other and what is the best way to decide what’s right for you?
Both A business and a practice Are forms of a business, however have a different structure to how the make and spend money. A practice is a lean model, typically very agile and attracts low start up costs.
A business has considerable start up costs, inventory and can take longer to open the doors and start trading. However the big advantage to a business is that you can grow and build your business with the idea to sell the function, processes and products for a big profit and hopefully fund a new venture or retire comfortably. A practice is only successful when you are “practicing” and as soon as you step away from the function of the business it no longer makes money.
How can you determine what’s best for you and your future? Below are some advantages and disadvantages to consider that may help you determine the best path forward:
Practice Advantages:
Reputation: As the practice and the owner are intrinsically linked, the owner enjoys a high level of status and reputation.
Product: Based on the provider’s (your) skills and reputation, you can focus on delivering that service without being distracted by having to create new products all the time.
Agility: With low or no inventory the company can move or update its services quickly.
Cash flow: A practice has pricing that focuses on time and materials, the probability of the revenue stream may be easier to determine.
Practice Disadvantages:
Goodwill is fleeting: Because the practice revolves around your reputation and ability to deliver, goodwill dissipates quickly after your departure.
Wealth and revenue are linked: Your brand and ongoing income are provider-dependent, and costs of your practice tend to be fixed instead of variable.
Limitations: Your time is finite, so growth potential is limited to your capacity to deliver.
Revenues follow services: Cash flow can be tight as the practice relies on service delivery followed by payment and sales cycles can be unpredictable.
Business Advantages:
Upfront payment of product: Because the product is not reliant on you delivering it, the payment for a product often comes before the delivery of the product.
Scalability: If a service becomes a product then it can be scaled and is not solely dependent on your ability to deliver the service.
Goodwill: A business with a packaged product and service can build equity and sustainable goodwill.
Tax flexibility: A business has greater control over its tax obligations. For example, you can shift income recognition or re-characterize gains.
Business Disadvantages:
Management: A business must have a management structure in place that create and executives the business strategies.
Pricing: A business must charge for much more than just service delivery. It must cover marketing, rent, overheads.
Product and services: All must be constantly updated requiring time and cost to update.
Marketing: Your company's branding, packaging involves more than just advertising the skills and reputation of a service provider. Professional marketing, PR and advertising can cut into your company's cash flow.
Whatever your decision, make sure that you plan for the future. As they say, fail to plan and you plan to fail.