Careful budgeting is often the preoccupation of numbers-focused people such as accountants; in fact, it’s probably not in the typical entrepreneur’s DNA to calculate the financial benefits and costs of starting a business. A savvy entrepreneur may make all of his or her calculations on the back of an envelope and dive headfirst into a grand undertaking, leaving the rest to talent and passion. Whether you’re starting a home business for several thousand dollars or opening a retail shop that requires hundreds of thousands of dollars to start up, planning financially for what you are about to do can give you a sense of what is at stake.
BEFORE STARTING A BUSINESS
There are several steps you can take to be in control of some of the financial aspects of starting a business:
- Write a monthly budget that accounts for your current income and household expenses; this will give you a handle on what you’re spending and making.
- Write a monthly budget for your business that accounts for initial start-up and ongoing costs; your success will be measured on frequent results.
- Have a realistic financial expectation for the revenues of your business.
- Know the size of your market and what portion you have a reasonable chance of getting. The financial plan should include a cash flow and break-even analysis.
- Check your personal credit; this is especially important if you are going to take a loan.
- Do the positive thing: pay down debt, build a cash cushion, and search out and purchase benefits that you’d typically have if you were employed.
- Separate your business and personal finances: maintain separate checking accounts and credit cards, and keep accurate records. (This may be especially important for tax purposes.)
- Create a separate entity (LLC or S-corp, for example) for your business to further disconnect your personal finances and the business finances.
- Understand the liability and risks associated with your business, and plan and protect around those.
- Plan for rainy days (maybe a monsoon).
- Seek professional tax and legal advice
- Have a financial business plan that accounts for the salary you are giving up and the salary you need to make in order to pay for your (likely trimmed) household expenses.
- Create a strategic business plan for your business that includes goals and objectives you can measure and benchmark over time.
QuickBooks has a Startup Financial Planner, but there are many free services from other companies that provide worksheets to help you begin your financial planning. An advisor or business consultant may be helpful if you don’t feel comfortable with the do-it-yourself approach.
STAYING ON TRACK
There are the classic stories of entrepreneurs who sold their houses, maxed out multiple credit cards, cashed in 401(k) plans and downsized their lives to make their dreams come true. These tales sometimes end in triumphant success but more often, and less heard of, are the stories that end in bankruptcy and failed business dreams. The most important steps are taking inventory of what you are giving up for this new business and what you plan to gain, and then preparing and planning accordingly.
While successfully launching a small business has many intangible benefits such as following your dreams and passions, success should also be measured in financial terms. The return on your contributions of time and money has to be high for the risks taken. Adequate financial preparation and follow-through will help you measure your entrepreneurial successes and mitigate risks.
WJ Rossi is a partner with Koss Olinger, a Gainesville-based wealth management firm that has been helping business owners succeed for 46 years. WJ sits on Koss Olinger’s Investment Advisory Committee and is key in the firm’s investment management, estate planning and income distribution strategies. He can be reached at [email protected] or 352-373-3337.