by Practical Money Skills
If you've got a business idea and you couple that with an entrepreneurial itch, you may find yourself tossing and turning at night trying to figure out a plan for moving it forward – dreaming of the day you'll become your own boss.
I've hung my shingle in the past and know from experience that there are ups and downs to starting and owning a business. The initial years can be especially tricky, but the long-term payoff can also be financially and personally rewarding.
If you're up for the challenge and excited by the prospect of becoming a business owner, there are a few steps you can take to help make sure you'll start your new venture on sound financial footing.
1. Create a business plan. Using a written business plan as a guide for your first few years as a business owner can be very helpful. The process of researching and writing your business plan can also teach you more about the industry and may help you better understand the viability of your idea.
A good place to start could be with either the U.S. Small Business Administration (SBA) or the SCORE Association (a non-profit supported by the SBA), who have free resources and training that you can use to help you create a business plan.
Once it's complete, you can use the business plan to attract partners, investors and employees who share your vision for the future of the business.
2. Research your potential start-up costs. You might already be adding up necessary expenses in your head: a website, office or retail space, payroll if you need to hire employees, etc. However, there are also lesser-known expenses that may surprise first-time business owners.
For example, you could have to pay fees and permitting costs to your city, county or state. And depending on the business, you may need to get licensed and purchase insurance, all of which have costs that can add up.
Knowing your actual start-up costs, which should be factored into your business plan, can be important as you look for funding. And whether you're tapping into personal savings, asking friends or family for investments, crowdfunding or applying for a loan, you should stop to consider the potential pros and cons of each approach.
3. Separate your personal and business finances. Even if you're starting as a sole proprietorship and decide not to form a business entity, it's generally a good idea to separate your business and personal expenses.
One way you might consider doing so is by opening a new bank account that you only use for business-related transactions and putting all your business-related purchases on a debit or credit card linked to that account that you don't use for anything else.
Keeping your accounts separate can save you time when you file your tax return or need to review your expenses. If you incorporate your business, separating your personal and financial accounts can also be an essential step in limiting your personal liability.
4. Consult with experienced professionals. Setting your time aside for research and learning can be important, but paying for professional expertise now can help you protect your business later and lead to long-term savings.
- Attorneys can provide guidance as to how to structure your business and make sure the legal paperwork matches the vision in your head. They may also be able to tell you about relevant local laws that could impact your business.
- Accountants can help you determine which business type (e.g. an LLC versus an S corporation) makes the most financial sense for your business and offers the most tax savings.
- Insurance agents or brokers can tell you about the different types of insurance you can use to limit your liability.
5. Track your income and expenses. Knowing where your money comes from and goes can be important when you're trying to decide where to reinvest within your business and where you may be able to cut costs.
You could start with a simple spreadsheet if you don't have a lot of clients or overhead. As you grow, you'll likely want to use more complex software to manage your finances.
There are a variety of inexpensive cloud-based accounting, invoicing and payroll systems for sale that you can use to help with the administrative tasks. Many let you give limited access to a bookkeeper or accountant if you want to outsource some of the work.
6. Start building your business's credit. New business owners may not realize that there's a difference between personal credit and business credit. Your business can have its own credit reports and scores, and you may be able to use your business' credit to secure financing or get more favorable terms from vendors.
You can start building business credit by working with vendors that report your payments to the business credit bureaus (you can ask them or look online for lists). In some cases, using a business credit card could also build your business's credit.
7. Create a business emergency fund. An emergency fund can help you get through a personal or family crisis without worrying about your finances. Consider building a separate emergency fund for your business, which may offer similar benefits in case you hit a slow season or unexpected setback.
When you strike out on your own, money isn't always the most important thing – hopefully you've found something you also love to do – but you want to make sure the numbers add up. Putting in the time to make sure your finances are in order, and creating a plan for how you'll grow your business, can be essential to becoming a successful entrepreneur.
by Practical Money Skills
You can break personal finance into three broad categories: income, expenses and savings. Your personal cash flow statement lists your income and expenses and a common goal is to end each month with a positive balance – with money left over to put into savings.
We often tend to focus on how to make the most with what we have, but don't forget the third category. With planning, dedication and an understanding of how your skill set could benefit clients, you could make the transition to a more entrepreneurial role and increase your income.
A friend recently shared her experience. She started working out while looking for a way to release stress. Soon, exercise became her hobby. And then her passion. Several years later, she got the necessary training and certifications to go into business for herself as a fitness instructor and personal trainer.
Others have similar experiences. A photography or coding course sparks intrigue, which leads to exploration as a hobbyist and an eventual career or part-time income source. Or later in life you may decide it's time for something different and start by exploring your interests and then setting off on an entirely new path.
Acknowledge that you may be giving yourself a new job. First, consider whether you really want to turn something you enjoy into a financial pursuit. Some people find that the transition can "ruin" their hobby in a way – it could feel like a chore or job rather than an enjoyable outlet. As long as it doesn't require a substantial upfront financial investment, testing the water before diving in fully could be a good idea.
With the proper clearance, you can stay at your current role and start a small side business or offer your services as a freelancer to see what the experience will be like (and how much money you can make). You might find that a profitable, or cost-covering, hobby is enough.
Identify ways to make your offering uniquely yours. No matter how hard you try, you can't will money into existence. It will take a lot of work to make a business succeed and even with a driven entrepreneur at the helm, many businesses don't make it past the first several years.
But whether you're creating and selling a physical product or offering a service, you bring a unique set of skills and experiences to the table. Try to figure out how these can distinguish your offerings or add a unique twist that will help potential customers meet their goals.
Businesses succeed for a variety of reasons. They might create something entirely new, figure out how to make something less expensive or more luxurious, put their efforts into customer support or figure out a fun and creative way to advertise their product.
Figure out who your target customers are and what they like. If you're going to make money you'll want to identify a target market. Generally, this will be a group of people who want and can afford your offering. Both qualifiers are equally important.
Be brutally honest with yourself. There isn't always a profitable market, and some hobbies don't make great businesses.
Working within a proven market – selling something that people already buy – can be a good thing because you know there's at least some demand. From there, you can figure out the best way to find customers that like the twist or extra touch you've put in.
Drawing on my friend's experience, she has discovered several ways to attract her clients. Some people already have an active lifestyle and don't necessarily need motivation. For them, she emphasizes her knowledge of fitness and health. She can craft a meal plan that aligns with their physical goals and work with them to improve their form and help prevent injuries.
With clients who are struggling to get started, she emphasizes the value of having an accountability partner. She takes the planning and worry out of working out; they just need to show up.
Are you ready to take action? Managing spending and saving are essential elements of any financial life. With some thought and planning you could grow another essential element – your income – while doing something about which you are passionate.