Successful entrepreneurship, part 1: Cracking the code

We often associate getting an education with achieving financial success and security. Learn how a disciplined sense of entrepreneurship can be equally effective.

Most people have heard the story of the penniless immigrant who came to Canada with nothing but a dream for a better life, but within a single generation accumulated a lot of wealth.I am speaking from experience. My paternal grandfather immigrated to Canada in 1954 without a job, with only a grade school education, US$100 dollars in his pocket, and speaking not a lick of English. Yet, within 15 years after opening up a small Chinese take-away restaurant, he was able to put his son through law school and buy a home, all paid in cash.

This is a mystery to the typical person who graduates with a post-secondary education and goes on to work in the labour force as an employee (i.e., most people!). The reason is that our educational system specifically trains its students to become employees rather than entrepreneurs.

So, when we hear about these rags to riches stories, we ask ourselves “How did they do it?” As someone who grew up in an entrepreneurial household, here is my take on cracking the code to successful entrepreneurship. 

  1. In most cases, one will never become truly financially independent working as an employee. Whether you are an entry-level bookkeeper or the CEO of a large organization, you can be unexpectedly fired by whomever you report to. You are therefore susceptible to financial catastrophe.
  2. Therefore, the only way to achieve complete financial independence is to build and maintain a successful business.
  3. There is a “magic formula” that will allow to evaluate a businesses’ odds of success:

    [(Sale price of product – Variable cost of product) × Units sold] – Fixed overhead costs = Profit

    This formula will be very familiar to accountants – it’s called the contribution margin ratio.

Let’s demonstrate this formula by using a bubble tea business. Wonder why there are so many bubble tea shops in in big cities? Because they make a heck of a lot of money with little risk.

  • price per bubble tea drink: $4.00
  • cost to make per drink (water, powder, sugar): $0.50
  • drink sales per month (assuming 100 sold per day): 3,000 drinks
  • monthly rent (including any applicable services and utilities) for shop: $3,000
  • assume no labour costs (in the early years, the owners will work the shop themselves)
  • therefore:
    • [($4.00 - $0.50) x 3,000] = $10,500 in sales
    • profit after paying rent: $10,500 - $3,000 = $7,500

Once you apply this formula to the Coca Cola Company or PepsiCo to analyze their beverage businesses, you can begin to understand why soft drink companies have grown from humble beginnings to the global companies that they are today.

You can also use this formula to evaluate almost any small business you might be thinking of getting into: restaurant, nail salon, hair salon. You should quickly realize that it’s best to choose businesses with a high profit margin (i.e., high selling price for product/service and low cost of supplying the product/service) and high customer traffic (i.e., units sold, people serviced).

So, for all you aspiring entrepreneurs out there, I hope that I’ve helped take out some of the “mystery” behind successful entrepreneurship. Use this tool wisely and never stop dreaming!

Keep the conversation going

Have any questions or comments? Post a comment below, or if you want to ask discreetly, you can contact Victor directly.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Victor Fong, CPA, CMA, LIT

Victor is a Chartered Professional Accountant and Licensed Insolvency Trustee based in Toronto. He is the president of Fong and Partners Inc., a Licensed Insolvency Trustee with offices throughout the Greater Toronto Area.