Tuesday, November 2, 2010

Work for a Large Company or Start A Business...financially which is the better option? The Grand Disconnect.


When I started out on this journey, I had a theory.  It was a grand theory, that I had hoped to be true, as I am an idealist.  Let's start at the beginning.

I was working at a large corporate America company, making a very reasonable salary.  I noticed that we billed out our engineering staff at around $120 an hour to companies.  Yet, our take home pay was around $30 an hour.  How could this be, I wondered?  How is it that a company can bill another company so high for your time, and as the employee you only receive a small fraction of that.  That did not seem fair, after all, you were the one doing the work!

So, I extrapolated from this that if you wanted to make your fair share of money it was only reasonable to go off and work for yourself.  Thus you could make the amount closer to $120 without giving the 75% to the company for having their name on your business cards.

It's now three years later, and its safe to say that I have new insight to all of this.  It's very rare that a solo person can actually go in and actually get paid a huge amount of time for their services.  In actuality it's the brand name on the card that's the 'headliner', carrying all the weight and infrastructure, and you are the supporting role.

In most cases, it's actually a financially wiser decision to work for a large company.  Even I'm surprised to be writing this.  My theory was that if you find what you are good at, all you need to do is do it as a solo act and boom, you are golden.  I did not realize how much it involved to even earn the creditability and experience to get to the point that someone would financially invest in you for your services.  And the fact of the matter is that large companies deal with large companies, so the money pipelines between them is large.  Individuals deal with individuals, and in these cases we watch every penny.

Small business owners have such a strong connection to their cash flow that their knuckles are white from grasping the purse strings.  Larger companies have such a division of responsibility that no one person feels the impact, thus they are more loose with spending and can afford greater financial fluctuations.

Actually being a cog in a machine that is already going has great financial advantages.
1) You get paid well from the beginning
2) You get paid regularly
3) You have a good salary that you can say that you've earned, so it's easier to justify getting paid that or more in future jobs
4) Job stability
5) You have money to work with in your job function
6) You receive health benefits, a retirement plan, stock options
7) Financial stability, financial stability, financial stability....

Being an entrepreneur has great financial disadvantages.
1) You get paid nothing in the beginning, for at least months, possibly longer, and with no guarantee that you'll actually ever make anything
2) You have to actually pay out in the beginning.  So while you have no income, you are having to pay money to even start up your business
3) You have to pay to set everything up.  You have to pay the government to set up your corporate structure, you still need a car for transportations, you have you pay to have bank accounts, web space, payroll, etc...
4) It takes a long time to get yourself credible enough that people will pay you for your services.  Even once they start paying you, the cash flow is neither continuous or guaranteed.
5) You are not liable if something goes wrong.  To reduce liability, buy insurance.  Oh wait, that costs even more money.
6) The sad fact is that only 44% of businesses survive to the four year point.

This post is not meant to discourage you from starting your own venture, it is meant to shed light on the matter.  If you want to start a business, you either need to 1) be extremely passionate about something and wanting to start it or 2) be extremely passionate about money and going into a business that you are pretty darn sure you can make a pretty penny on

Money is actually very hard to make as an individual.  People work their butts off painting houses and make $10 an hour.  What gives an engineer the right to make $120?  It's because it's usually not the individual billing, its the company.  And we expect companies to charge more.  We are more likely to question an individual's quote than a large company's.  Especially if it is one company billing another company.  A drop in a bucket seems to change people's perception of money tremendously, probably to the point of irrationally.  When the numbers are low we look at the pennies closely.  There seems to be a point where the numbers don't get looked at as closely, and when that happens, money travels a lot faster!

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