How to be financially ready to start a business – Episode 1



So you’ve decided you’re ready to take the big plunge and start your own business.  Congratulations.  Having transitioned from being an employee to running my own business, I can tell you, you will be in for some challenges, but also many rewards, not least of which is flexibility in how you manage your time.  I know of self employed people who like early morning, quiet, thinking time, and so choose to work for 2-3 hours from 6am, then take a break, do some exercise, have something to eat, and sit back down to continue working late morning.  Others work better at night, hitting full stride at 10pm and working through until the early hours.  Of course many businesses require you to be on deck during normal business hours to respond to customers, but even here you have flexibility, especially when you employ staff, to decide when you will be “at the coal face”.

So you’ve made your decision, but how to be financially ready to start your own business?  You need a roof over your head and food on the table.  Perhaps you have a family to support.  Most often the thing holding people back from taking the plunge into self employment is the financial worry.  But that is where good financial planning comes into play.  I don’t know about you, but sometimes I have pieces of work that need doing, and I just really don’t want to do them, primarily because I don’t know where to start and so it’s daunting.  So I keep pushing them aside thinking maybe I’ll feel in the mood to tackle that one tomorrow.  Eventually I bite the bullet and my usual strategy is to make it the first thing I do in the day.  So often, once I get cracking, I find it actually wasn’t nearly as big a deal as I had thought, and the piece of work I had been dreading is knocked over in half an hour.  Now whilst a financial plan to get you ready to start your own business will certainly take more than half an hour, I think it is common for people to put off planning for the move because the thought of doing the planning is just too daunting.  They just don’t know where to start.  Well let’s solve that for you!  None of us are getting any younger, so the sooner you transition into the thing you are passionate about, the more of your life can be devoted to that dream instead of clocking in doing something that is not totally fulfilling.

There are two elements required for you to be financially ready to start your own business – a Survival Strategy, and a Capital Strategy.  By Survival Strategy I mean how will you (and your family if relevant) survive financially whilst you get this business off the ground?  How will you maintain a roof over your head and food on the table?  The Capital Strategy concerns your new business – how will you fund the start up costs, marketing, perhaps fit-out costs and the like?

Step 1 – the Survival Strategy

The starting point in developing your survival strategy is for you to be clear on how much you spend.  That means doing a household budget.  Now I know that for most people doing a household budget is about as appealing as taking an ice bath in the middle of winter, but if you want to transition successfully from being an employee to running your own business, it just needs to be done.

I would set-up a spread-sheet (I have created one you could use, which can be found in our Resources page here), but if you’re not comfortable with that, hand written on a piece of paper will work too.  Set up something like this:

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Start with your housing costs – mortgage repayments or rent.  These are likely to be your largest expense.  Of course if you’re lucky enough to own your house without a mortgage, well done you, you can skip past this bit.  Record expenses as either weekly, fortnightly, or monthly, and then tally that to a yearly figure (the sample spread-sheet will do this automatically for you.)

So now you know how much it currently costs per year to live.  Save that one, now create a second version with what is necessary to survive.  Let’s be realistic – if you want to pursue your dream of starting your own business, some sacrifices will be required.  Perhaps you will need to forgo an annual holiday.  Maybe spending on clothing and eating out will need to be cut back for a while.  Short term pain, long term gain!

An option you may be able to explore if you have a mortgage is reducing your loan repayments down to the minimum required, as most of us, very wisely, pay more than the minimum.  You could also explore having the loan structured as interest only.  In both cases this is not intended to be a long term thing, but it may be helpful for a year or two as you get established in your new enterprise.

Okay, so you’ve crunched your numbers and the minimum amount of money you need to survive is let’s say $42,000 per year.  I would divide that by 12 to get a more meaningful number of $3,500 per month.  Now of course bills are lumpy so some months it will be a little more and some a little less, so a bit of a buffer of cash in the bank is needed.  But you now have a target to hit – for you to progress your dream of starting your own business, you need to be able to generate $3,500 per month as a minimum.

The next step in devising your survival strategy is thinking about how many months it will be before you first start having enough revenue in your new business to begin drawing some income.  This will vary greatly from business to business, but whatever period is your best guess, from my experience, double it.  So you’ve done some basic business planning (a topic for another post), taken a best guess at what revenue you’re likely to raise and what your expenses will be, and determined that you would be in a position to start drawing some income from your business 4 months after commencement.  This will be wrong.  No matter how hard we try, these forecasts are just educated guesses.  Which is why I say, whatever period you estimate, double it.

So we need to assume in this example that you will have no income from your business for the first 8 months.  So where is the $3,500 per month going to come from?  When I left my employee role to start my own business, I had several months of accrued long service and annual leave that was paid out.  This covered several months of expenses and was essential in enabling me to make the transition to self employment.  Perhaps you have money available to redraw on your home loan.  Maybe you need to find a part time job to bring in some income whilst you get your business going.  Perhaps some freelancing via sites such as Upwork, Airtasker, or 99Designs.  Think broadly, ask around for ideas.  You may have a partner generating income which covers some or even all of this minimum income need.  Every solution is unique, but develop your survival guide and you are well on the way to achieving your dream.

Step 2 – the Capital Strategy

Okay, so you’ve got a solution to keep a roof over your head and you wont starve.  Wow, you can taste it now can’t you?  This transition to your own business might actually be able to become a reality.

Now how will you fund your business?  That’s where the Capital Strategy comes in.  Spread-sheet time again!

Many business these days are service businesses, and so start up costs are fairly low.  Certainly when I set out to open my financial planning business, I needed a computer, a mobile phone, some stationary, and not a lot else.  I was able to rent a serviced office which included furniture and an internet connection, and I joined a network that provided access to the research and planning software that I needed, and who waived their usual monthly fee for the first 6 months to give me a chance to get going.  You might be able to work from home initially (maybe permanently although most people I speak to find this a bit lonely long term – we are social creatures, at least for parts of the day!).

Once again, I have created a spread-sheet that you might want to use.  It is in our Resources page, which can be found here.  None of the cells are locked, so chop and change it as required.

With this completed you will know how much cash you need to start your business, and then how much you need on a monthly basis to remain afloat.  For many services businesses, the initial capital required is pretty low.  You may be able to fund this out of savings, redrawing on your home loan, or perhaps a loan from a willing family member.  If your business requires significant equipment, then typically the seller of that equipment will have a financing solution whereby you can lease it over several years.

I suggest doing a little reading on the Lean Start-Up methodology.  There’s plenty of article about it on the web.  It may have some application for your business.

The monthly requirement for the business to survive can hopefully be meet fairly quickly via your business revenue.  Estimate what you expect your sales to be.  Then reduce it by say 30% to be conservative.  If you are providing products or services to other businesses, allow for the fact that most pay 30 days after receiving your invoice, and many drag out longer than that. Think about how you can get deposits or up front revenue to help with your funding.

The most likely outcome is that you will have no or minimal revenue for the first few months, then it will progressively grow.  Your Survival Strategy will cover your household expenditure needs until the business can start to distribute some income.

Your Capital Strategy will need to resolve how to cover the initial outlays for equipment and the like, and also the running costs of your business. Perhaps you determine that 50% of the business running costs can be met by business revenue in month 4 say, increasing to 70% in month 5, and then by the 6th month, the business will be generating enough revenue to cover its overheads and start to be in a position to payout some income to you.

So there you have it, a framework to get you financially ready to start your own business.  If you have any questions please fire away below.  Or if you’d like to find out how we can work together to develop a tailored solution for your transition to your own business click here.

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.