Starting a new business isn?t just about the business itself. Becoming an entrepreneur is a life transforming event. You?re moving from a life in which you rely on an employer to supply your financial needs, to one in which you?ll be fully responsible for everything.
It?s a true high wire act, which is why it?s super important to construct a financial safety net, ready to catch you if you fall. And the best time to do that is before you even start your new business.
Preparing your savings
A large cash cushion is one of the very best assets you can have when starting a business.
Most financial advisors recommend that we have liquid savings equal to at least three months living expenses as a part of sound financial management. If you plan to be self-employed, six months is a much better metric. If you have less, it?s best you don?t even attempt starting a business.
Start building your savings before you start the business. Unless your business turns into an instant success?and those are more popular in the media than they are on Main Street?the best time to save is before you quit your job. Saving money with the uncertain income of a new business will be close to impossible. Because you can do this ahead of time, you should make the effort.
Preparing your debts
Debt and self-employment don?t mix?the less debt you have the greater your chances of business success. It?s not just the monthly payments that hurt either, although that?s bad enough. Knowing you have to bring in enough income to pay your debts causes the kind of pressure that can send a would-be entrepreneur over the edge. When you have a steady paycheck coming in you can match expenses with income; when you?re in business that relationship isn?t so neat.
Maybe you can?t eliminate all of your debt, but you can make an effort to lower them. Pay off as many small loans and credit cards as you can. If you have a car loan, consider selling the car to eliminate the debt (and payment!) then buy a cheaper car for cash. Any debt you eliminate will be one less cash flow drain going forward?and that?s just as good as generating extra income.
Preparing your stuff
We live in a time when a lot of people have a lot of stuff?boats, second, third and even fourth cars, vacation homes, high priced recreational equipment. All of them cost money to maintain, and many have debt attached to them. If you?re serious about making it as an entrepreneur, you may need to sell off some of it not only to lower expenses but also to eliminate debt.
There are benefits to doing this apart from debt payoff and expense reduction. The money you make from selling your stuff can help you reach your six month savings goal. And by getting rid of some toys, you?ll have more time to devote to your new business?and believe me, you?ll need it. Especially at the beginning.
Preparing your income
Generally speaking, this will be the single most important financial preparation for self-employment. Cash flow is the key to self-employment success, and finding a way to keep one coming in during the start up phase can be the difference between success and failure.
It?s important to realize that business income probably won?t be happening during the first few months of your venture, and may even take a year or more to materialize. In and of itself this may not be a problem, as long as you have other sources of income to cover your living expenses.
Some new business owners try to accomplish this by tapping their savings, but that can be a strategic error on at least two fronts. First, your savings have a limit, and as you approach that limit, panic can set in and that can interfere with running your business. And second, as time passes and your business grows, you?ll need money for expansion and that won?t be there if you?ve used your savings to survive.
The key is to think strategically?you want to develop income sources while preserving your capital to the greatest degree possible. How do you do that? With outside income sources.
I?m a strong advocate of starting with a side business, while you still have a full time job. That will enable you to start your business, make mistakes, and drive it forward while your life is being financed on someone else?s payroll. Only when you?re certain that the business is viable, profitable and has sufficient potential do you take the full time plunge.
But what if you don?t have a job?
The truth is, unemployment is a really bad place to start a new business. If you rely on your savings to cover living expenses, you could end up broke and unemployed if the business fails. If you rely on credit, you could end up unemployed and deep in debt. That?s why you need a cash flow.
My suggestions for a cash flow would be one or a combination of the following:
- Take a full time job anywhere even if it?s a job you don?t want (which will also motivate you to make your business work)?you can downshift to part-time work as your business grows
- Take contract/temporary work where ever you can?that was my approach
- Sell what ever skills you have to the public?home repair, web design, admin skills, tutoring?everyone has some skill they can sell
It might help to know that when you?re an entrepreneur any and all income sources are on the table at all times, so all of these suggestions are good practice. At a minimum, you can fall back on them during times when your business is slow. It?s worth embracing.
Preparing your finances for self-employment is an overlooked part of the process. New businesses don?t just fail because they?re bad ideas. Just as often they fail because the business owner has financial issues apart from the business itself that don?t allow him or her the time to push the business over the goal line. Proper advance preparation can give you the staying power you need to make your business work.
What other preparations would you recommend to increase the chances of success for a new business owner
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Hi NR–I think that’s a big part of the whole drive to be self-employed, to have an income source as we get older. What you’re saying is very true, as we get older finding a job and keeping it become more difficult. I’m not an IT guy, but I’d guess it’s even tougher in that field since many employers want people who are “cutting edge” and typically view that as younger workers.
Starting some sort of side business now would be a good start, and you can expand it in the future as your circumstances change. It could mean that you’ll always have a career and income come what may.
I really do think the 20s and 30s are the time to do this. You’re at the peak of your employability so you have options. But one day, almost unnoticeably, you wake up and that employment certainty disappears. That used to happen at around age 50 but now it’s happening much sooner.
Don’t get married. Don’t have kids. Once you do, you’re in over your head and you can enjoy a promising career into your 110s. Of course, if you raise you kids “right”, you can move in with them at age 60 and barter your housekeeping and child-sitting services for free room and board.
Hi David–That sounds like the better way (the second part about moving in with your kids). I’ve often thought that kids can make self-employment harder–because they’re additional burdens–or they can make it easier by giving you the motivation to work for yourself so you can spend more time with them. Both have been true for me because I’ve worked from home for many years. I wouldn’t trade the experience!