Both owning a business and being an employee can be a steady living. The problem is the gap between them. How do you keep paying the bills when you’re quitting your job to start a business? What covers the time period between when you quit and when your business starts making a profit?
This depends a great deal on your type of business, how quickly it can become profitable, and how abruptly you need to start. Can you ease into it, or will it be like building an airplane while you’re already in the air?
Easing In
If your business is the outgrowth of a freelancing job or side gig, you can transition fairly seamlessly from one to another. You start out by doing the work on evenings or weekends, after your regular job. Once you have plenty of clients and a good cashflow, you can give notice to your boss.
This also works for any business you can start off gradually, with no employees or office space. “Building a business in the garage” is part of many success stories. You’ll end up working twice as hard for a while, doing all the work it takes to get your business running while also making sure not to disappoint your boss. But during this time period, your business income can supplement, rather than replace, your paycheck. It might be a time when you are able to save a little bit.
Having a safety cushion remains important, even when you enter the business world gradually. New businesses are more fragile than established ones, and a lot can go wrong. What if, just as you shift to full-time, several of your clients stop wanting your services at once? What if it turns out your sales don’t scale up with your available time as well as you thought? For this reason, you shouldn’t consider starting a new business until your emergency fund has enough to cover three to six months of expenses. If your business doesn’t take off, that gives you some time to try again—or to find a new day job.
The Clean Break
If your business idea requires you to hire people, rent a building, or start off working full-time, there’s no way around it: you’ll need capital to start out with. Sourcing business capital often involves seeking out donors or borrowing money. Of course, if you have money of your own to invest in the project, that helps too.
Just remember that paying your own bills is a crucial part of running a business. If you have to pull out partway through because you can’t survive without a paycheck, you’ll have wasted time, money, and your dream. Experts say it takes two to three years before a business is fully profitable. How will you survive during that time? Ideally, you have years of expenses already saved up so that you don’t have to pay yourself a salary till later. But since that’s not common, you may have to take on debt for your needs. Remember not to rely on credit cards, but to borrow money at the lowest interest rate you can.
What about being supported by someone else? If you have a spouse or parent who is willing and able to cover your living costs, you have a massive asset many business founders don’t have. But remember not to take advantage of others. If you expect your spouse to support you on their own for years, make sure they really understand what they’re getting into. Your business should be something that benefits them as well as yourself. Make a ten-year plan with your spouse that includes room for their own dreams.
Sometimes business gurus recommend you leap into a new business without a parachute. Not having a safety net, they suggest, will motivate you to make the business a success! Given half of new businesses fail, this is terrible advice. Think about all your current expenses. What would happen if you couldn’t pay any of them? If the answer is just “move back in with your parents” and nothing else bad happens, fine, take your chances. But, if you don’t have someone else supporting you, you’ll need an income. That can come either out of loans or out of your personal savings, but you need to know your bills will be covered during your business’s startup phase.
Budgeting While You Start Your Business
Planning to live on half as much while you build your business may be unrealistic. However, there are things you can do to minimize expenses and leave more money available for your business.
First, put off any major expenditures till later. The middle of launching your business is no time to remodel your house or go on a big vacation. You can’t be sure no unexpected costs will come up during that time, like medical bills or car repair. But you can leave planned expenses till your business is bringing in income.
Next, prepare a budget before you start. Create a list of all your necessary bills and expenses and compare that to your current spending. What can be removed for the time being? If you’ll be busy starting your company, you might not have time for that gym membership or Netflix subscription anyway. By economizing for a while, you extend the amount of time you can spend trying to get your business profitable.
Talk to Your Financial Advisor Before Starting a Business
It can be hard to judge whether you’re ready to start a business when you’ve never done it before. Just how secure do your finances need to be? How long will it take for your specific type of business to earn money? A financial advisor can help you look over both your personal finances and your business plan. Their recommendations can help you build a long-term plan to reach your goal of founding a company. To meet the right advisor for you, contact us today.
