I love entrepreneurship. It isn’t for everyone, and yes it is risky (though there are some things you can do to minimize startup risk), but there are also a lot of benefits to running your own business. Maybe you realize that a large percentage of American millionaires are small business owners and you want to be in that group. Or maybe you would like to run your own business to gain some flexibility and control over your work environment. Regardless of the reason, there are things you should consider doing in advance of taking the big step of doing your own business full-time.
1. Have a big emergency fund
When I first started coaching entrepreneurs I was often surprised just how financially UN-prepared many were. Running a business is risky and income initially is often limited and unreliable. Plus it is a good idea to feed most of the initial cash flow back into the business to strengthen it and further grow the venture. To make sure that your personal situation doesn’t force you out of entrepreneurship – making you get a job outside of your own business to help pay your personal bills – be prepared with a large emergency fund.
Financial advisors generally recommend three-to-six months worth of expenses saved in a savings or other safe account to be used as an emergency fund in case an unexpected expense comes up (doesn’t it always). For an entrepreneur starting out on a new venture I’d encourage you to have the full six months – and perhaps even more (like a full year) saved up.
2. Get a grip on your cash flow
One of the more common reasons that new businesses fail is lack of good financial management. When you run a business you need to pay attention to income and expenses, you need to define budgets for various projects, and you need to pay attention to your finances overall to make sure that you are on track with projections – and if you fall off-track you want to know so you can make adjustments and get back on track.
You understand that, right? Well running a new business has a lot of similarities to running a household. If you don’t have a good understanding of your personal net worth and/or you don’t have a personal household budget and/or you don’t have a plan to reach big goals (college, weddings, retirement, etc.) – you will likely struggle with the business finances too. While these are fairly basic concepts, it amazes (scares!) me just how many entrepreneurs “don’t bother” managing their personal finances.
If you haven’t already, but together a household budget. In fact, I’d recommend two budgets. One should be a bare-bones budget that covers the “four walls” of personal expenses: housing, transportation, food, and clothing. Then have a standard budget that covers those same things but also variable expenses – eating out, vacation, entertainment, etc. That way you can understand the minimum amount of money you need to support your household, plus have a solid number on what it takes to maintain your lifestyle beyond that.
3. Have some income
When I first started OrcsWeb back in 1996 I retained my salaried job. I performed OW services in the evenings and on weekends while it was just getting started. After a couple years of slow growth the venture reached a point that it needed full-time workers, but it wasn’t yet at a point that it could replace my other salary. What I wound up doing was to hire a couple of people first and kept my salaried job for a few more years.
Having an income beyond the business startup removes a tremendous amount of pressure. When you aren’t sure how you are going to pay the household bills next month, believe me, it will impact your business. If you have a working spouse – that’s great! If you don’t, you (and/or your spouse) might want to consider some part-time work or side-hustles to bring in some income beyond the business venture. Any extra money is going to help lower stress and allow you to focus better on growing your business.
4. Dump debt
I know – oftentimes certain debt is necessary, especially mortgages to purchase real estate (though having the house paid-off is certainly possible too). There is a lot of debt that definitely isn’t “necessary” though – specifically consumer debt. Credit card debt, personal loans, car loans, and debt on other things that are depreciating in value can really hinder your personal cash flow and net worth.
As part of the cash flow management process you should also look into ways to eliminate your personal debt. The more payments you have, the less monthly free cash-flow you can enjoy. Carrying debt also adds a level of risk with those obligations oftentimes driving up your required income just to maintain past purchases. Business startups are risky enough – de-risk your personal situation as much as possible before adding more risk into your mix.
Having these four things taken care of – well in advance of jumping into your new venture full-time – will be a huge stress reducer. There are enough challenges to starting a new business without the additional challenge of constantly worrying about your family and personal expenses.
I would (and do) recommend the emergency fund, budgeting, and debt elimination for everyone. These things before even more important though when you are running a new business – or even considering the launch of a new business in the future. In fact, on that second point, cleaning up personal finances can sometimes take a long time, so why not start addressing that now – even if a business venture is way out in the future or not even on the radar yet. There is no downside to getting your financial house in order, so do it now and be prepared to jump on an exciting opportunity when it comes up down the road.