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How to ... Prepare financially to start your own business

April 20th, 2007 at 05:18 pm

Quitting your job and starting your own business is a real adventure: exciting and scary at the same time. You are voluntarily giving up your regular paycheck and benefits in exchange for the freedom of being your own boss, the opportunity to pursue work you love, and the possibility of financial ruin if you don’t prepare properly.

Seven years ago my husband left his job and started his own business; but before he did that, we planned, prepared, and sacrificed for three years to make sure we were ready to withstand the loss of his paycheck. The following suggestions are based on what worked for us.

1. Do a “trial run” to make sure you really want to do that type of work and that you are suited to running your own business: If you are thinking of starting a business in a field unrelated to your current job, you could moonlight at a 2nd job in your area of interest. If you are thinking of starting a business in your current field (as was the case with my husband), it can be a bit trickier because you have to make sure you are not violating your current employer’s policies. We started up a small “test” company that we ran evenings and weekends, but made sure that it was different enough from his salaried work that there was no conflict of interest. We did not make a lot money at that venture, but we it was a great opportunity to learn about licensing a business, bookkeeping, state and federal taxes, etc.

2. Cut back on your expenses wherever you can: I’m talking about major lifestyle changes, not just cutting back a bit here and there. Make sure you are ready to live on much less (or perhaps zero) income for awhile. To make sure we could live on just one income (mine), we sold our condo and moved in to the least expensive apartment we could stomach. We went from a cute condo in a nice neighborhood to an apartment complex where the police visited fairly regularly (not on friendly visits, mind you) and where I spent 2 full days cleaning before we moved in even though the place was allegedly move-in ready. Thinking back on it, I realize what a huge sacrifice we made. At the time we were actually happy to be doing it because we were keeping our eye on the long-term goal. [I am happy to say that after 4 years of apartment life, we were able to move on and buy ourselves a nice house.]

3. Make a plan and then save, save, save: Avoid borrowing money or using your credit cards if at all possible. Calculate how much money you estimate you will need to get your business started and keep it running for 6 months to two years (however long you think it will take you to see a profit), and then add at least 20% to that number to cover any unexpected expenses. In addition, make sure you have a very generous emergency fund established for your personal expenses. In our case, we waited until we had saved up my husband’s start-up money plus enough to support our reduced lifestyle for a year, and then he got the green light to give notice at his job.

4. Spend your start-up money wisely: For each purchase, ask yourself very seriously if your business will really benefit from having a top-quality, high-cost item. The answer will sometimes be yes, sometimes no. Don’t be afraid to spend money where it will really help your bottom line. But if a purchase is more about what you like or your vanity, you have to tell yourself no. For my husband’s business it made sense to buy a nice new all-in-one machine (fax, printer, scanner) so we bought it. However, for a desk all he really needed was something sturdy that he could sit at, so we rescued a freebie desk that was going to be thrown away. [Later, when I was preparing to start my own business and when my husband had seen several years of business success, he bought himself a handsome cherry wood desk and handed the dumpster freebie down to me.]

If you dream of owning your own business or are already planning to go out on your own, I wish you all the luck in the world! If you are willing to take the time to plan and prepare, and if you are willing to make some sacrifices to get your business started, you can do it and you will be happy that you did it!

4 Responses to “How to ... Prepare financially to start your own business”

  1. Broken Arrow Says:

    That's an excellent article. I hope it gets more exposure.

    My ex and I tried our hand at a business before, but it was ill-conceived. We didn't lose TOO much, and it was a valuable learning experience.

    If I were to ever think of starting my own business again, I will most definitely plan and save up for it much more carefully.

  2. scfr Says:

    Thanks, BA! A guy who is willing to live in a "closet" and keep said closet at arctic-cold temperatures to save on his heating bill while maxing out his contribution to his employer's retirement plan is clearly a guy who knows how to make short-term sacrifices for the long-term good. I have no doubt that if you were to start up your own business again, this time it would be a success!

  3. jodi Says:

    Excellent, excellent article - very well written. I'm glad you shared your experiences.

  4. LivingAlmostLarge Says:

    So a great post.

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