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So, you want to start your own business — in which you are your own boss and you’re in control of your professional destiny. You’re mentally ready to become an entrepreneur, but the question is: Are you financially ready? Making the leap from side hustler to full-time entrepreneur is a big move. Yes, you gain freedom and more control over your projects and schedule. However, you will also be completely responsible for your own financial future.
If you currently have a side hustle — or if you’re a freelancer — and are thinking about making the change to full-time entrepreneur, preparing your finances can help alleviate pressure. Plus, it can help you focus on building your business instead of constantly worrying about your finances.
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Here are five financial musts to consider before jumping into entrepreneurship:
Assess your financial resources
First things first, take stock of your financial resources before starting a business.
Take a good, honest look at your finances. How much do you currently have saved? Do you need additional capital? Do you need to apply for a small business loan? You should know exactly where you stand money-wise.
So, how do you assess your financial situation?
- Determine your net worth: What financial assets do you currently have? How much do you owe? A net worth statement is a financial balance sheet showing the total of your assets minus your liabilities. Determining your net worth can help you assess your overall financial situation and help you make wise financial decisions moving forward.
- Establish your financial business goals: These might include increasing profit margins, increasing revenue, earning a return on investment or saving for a comfortable retirement. During your assessment, make sure to document all of your goals and the time frame and priority of each.
- Analyze your business plan: Do you have enough capital to start and fund your business? If you need additional capital, will you use your personal savings to bootstrap, take out a bank loan or consider equity crowdfunding? If you decide that you need to seek additional capital, start planning right away.
Remember, starting a business is a huge endeavor — one that usually requires lots of resources and investments.
Map out your finances
Now that you know where the money is coming from to start your business, the next step is to figure out where the money will go. Create a comprehensive plan to allocate your startup money.
The key to launching a successful business is having a clear financial road map, and the best way to see where you’re headed? Start a budget for your business! Your budget should clearly highlight where your money will go, allowing you to make necessary adjustments and anticipate any future expenses.
Here are some tips to help you map out your finances and start a budget for your business:
- Establish a budget time frame. Before establishing a budget for your business, you must decide what timespan you want to cover. Usually, a budget will cover 12 to 14 months of business operations. Whatever period you want to plan for, make sure to break your budget down into months. Also, don’t forget to leave space for estimated and actual totals — this will allow you to fill in your budget as you progress.
- Estimate operating expenses. Determine the total cost of operating your business, including how much it costs to produce and deliver your products and/or services to your customers. Add up all fixed expenses that don’t necessarily change from month to month (i.e., salaries, rent, insurance, taxes, etc.). Then, add in variable expenses (i.e. costs of producing or purchasing products, packaging and shipping costs, sales commissions, etc.).
- Regularly update and review your budget. Establishing a budget is essential as it can provide you with information on how your business is doing. This financial report will alert you when your business is slowing down and you need to make operational changes. Your budget also indicates when your business is increasing, and that might be when you should consider hiring staff or adding inventory.
Understand tax burden
As a business owner, you will need to have the financial capacity to shoulder the taxes that come with starting a business. All businesses must pay different kinds of taxes, including federal, state and local taxes. Your “tax burden” refers to all forms and levels of taxes that apply to your business.
Here are just some of the taxes that your business might have to pay:
- Income tax for small business
- Estimated taxes for business owners
- Property tax on business property
- Excise taxes on use and consumption
- State income tax on businesses
Remember, taxes are a necessary part of doing business. So, learn your tax responsibilities and plan ahead to avoid any unpleasant surprises.
Calculate industry risks
It’s almost impossible to start a new business or launch a new service or product without some degree of risk. The secret to achieving success in the long run? Take calculated risks that minimize negatives, while maximizing positive outcomes.
As an aspiring entrepreneur, you need to be ready to take risks, and when taking risks, make sure that you do your due diligence!
In order to take a calculated risk, you must understand every little detail of whatever decision you’re about to make. For instance, if you’re about to start a new business, make sure to do your research about the specific industry you’re about to enter.
Also, a shrewd risk-taker can anticipate any potential mistakes and account for them. If your project falls behind, how will you meet the deadline? If your investor backs out, what course of action will you take? You need to ask yourself these kinds of questions.
Prepare a long-term financial plan
When you think about starting a business, you’ll naturally imagine it to be successful. However, the reality is that starting a business is not that easy, and success can be elusive.
Creating a business plan — along with a long-term financial plan — will help you be better prepared for any possible issues that come with entrepreneurship. Having a solid plan in place will help cushion your business through difficulties.
However, even if you already have a long-term financial plan in place, you need to be flexible, too. Remember, circumstances can change — sometimes unexpectedly — so be ready to adjust your financial plan accordingly. Always consider your contingency plans!
Armed with the above insights, you can be ready to enter the world of entrepreneurship with your eyes open, prepared to face the challenges of running a business head on. Good luck!