Owning your own business comes with a lot of benefits. You make the rules, and you reap the benefits of your company’s success.
But getting a business off the ground is much easier said than done. There’s a lot of work that goes into building a business before it starts to generate revenue. Even if starting a small business is your lifelong dream, it’s a venture that shouldn’t be entered into lightly.
Before you embark on the journey of starting your own business, make sure you have the right skills, cash flow, and life circumstances to overcome the inevitable challenges you will face. Here are five important financial questions to ask before you take the plunge.
1. What expenses will be required?
Businesses can range widely in the types of expenses required to open shop. If you’re starting an online business out of your garage, your overhead will be much lower than if you are starting a retail business in need of a physical location.
But there are other costs to consider as well, such as transportation costs and any specialized equipment, supplies (paper, office supplies, etc.), and products to stock your inventory.
2. Where will you get funding to start your business?
If you’re starting your own business, you’re likely going to be investing some of your money into that venture. But you might also need other sources. Consider collaborators and other investors seeking a stake in your business, and explore business loan products to decide if a bank can help you get your business off of the ground.
Funding should be secured before you sign any contracts or start your business. And make sure your funding can handle not just the startup costs but also the expenses you’ll need to cover until you start generating revenue.
3. How long can you comfortably last without taking a paycheck?
Starting a business is often a full-time job. In many cases, professionals quit their day job to start running their own business full-time. But without incoming revenue, you’ll likely need to go without a paycheck until your business is covering its own company’s expenses.
If you’re quitting your job to open your business, make sure you have enough savings built up to cover your living costs until you think your business will start generating revenue. If you don’t have those savings in place, you may need to hold onto your day job while getting the business off the ground in the evenings and on weekends.
4. How will starting a business affect your personal financial goals?
Are you prepared to accept the financial sacrifice that comes with starting your own business? This can mean, at least temporarily, that you have to stop putting money into retirement or other savings and use that money instead to fund your business on top of your regular costs of living.
As you’re getting started, this may mean cutting back on certain expenses and foregoing family vacations for a while. These sacrifices will likely be worth the long-term rewards, but you’ll need to be prepared to accept the consequences in the short term.
5. What happens if the business fails?
No one wants to consider the possibility that their business venture will fail. But it’s important to have a plan in place for what you’ll do if that happens.
Sketch out a worst-case scenario situation and forecast what will happen. Will the company’s failure eat up your retirement funds? Will the business be incorporated to limit your personal liability? Will you be able to find another job to start earning a steady income again?
A small business always carries a little risk, but you can limit this risk—and better absorb the painful blow of closing up shop—by creating contingency plans ahead of time.
Becoming an entrepreneur is a significant personal and professional decision. If you can find a way to create personal financial stability while pursuing your own business, you’ll be able to focus on doing all you can to help your business flourish—instead of worrying about how each small decision affects your personal finances.
Have questions about launching and financing a business? Talk to our team of experienced financial advisors here.