For many, the great American Dream includes opening your own business or “hanging your own shingle” as a consultant or freelancer. If you have an idea for a company that you believe could be successful and want to pursue this dream, it is important to do your homework.
There are important steps that every small business owner must take – they include:
Being financially prepared is another crucial prerequisite to becoming a successful entrepreneur and it starts with a solid financial plan.
Create a financial strategy
If you’re serious about becoming a small business owner, it should be considered a financial goal like any other, such as retirement. It is important to develop a strategy for funding the company over time. A business that lacks a sound financial base may have a higher risk of failing. For greater success, estimate not only your startup costs, but the amount of money you’ll need to fund the company for the next three to five years. Depending on your plans, these costs may be significant.
When striking out on their own, many self-starters optimistically believe that the business will generate enough income to meet their needs and expectations, and even help them expand their lifestyle one day. While this is a worthy goal, be conservative in your initial projections. It isn’t unusual for a business to lose money in the early stages. You need to have sufficient cash in place to support your personal financial needs while you work to make the company profitable.
Where to find the money
It is important to establish a dedicated pool of savings to help finance your new venture. To start, consider setting money aside from each paycheck for this purpose. Determine how much you can afford to save each month and how long it will take to build cash to meet your goals. If anything, err on the high side when projecting how much money you need to save before you open the doors to your business. If it’s practical, consider establishing your business on a part-time basis before you quit your day job. This lets you test your ideas, make modifications and build a base of customers while also maintaining a stronger financial position.
As you’re putting money away for your future business, make it a priority to continue saving for retirement as well as into your emergency fund. If you do, you will likely have stronger financial security in the event that anything happens to your new company’s revenue.
If capital is required to finance your startup, you may need to borrow money. Be cautious as you consider your borrowing options. It adds another level of financial risk to your plan. You must be confident that you can stay current with your loan repayment schedule. A good place to learn more about borrowing options is the Small Business Administration website (www.sba.gov). Also be careful about using personal assets (such as your home) as collateral to fund your business ambitions. If possible, you want to keep your personal and business assets separate.
Remember that if you are financially prepared to make your entrepreneurial dreams come true, you will be in a better position to withstand the difficult periods and allow the business the time necessary to grow and prosper. Talk to your financial advisor to determine the best approach to build savings dedicated to your future business.