When preparing your personal financials for business ownership, you need to do a personal financial assessment. Determine whether you are asset-rich or asset-poor, then make needed adjustments to increase your net worth. While you’re examining and increasing your net worth, you also need to increase your personal cash flow. Not only do you want to increase assets and decrease liabilities, you want to increase income and decrease expenses. Don’t just prepare a financial statement. Build your personal budget. Then, use what you learn to decide what changes you need to make to your personal finances before you start your business.
After you complete your personal financial assessment, it’s time to budget your money. Ugh! Yes, I just said the dreaded “B” word. Many times, people fear budgeting because the word “budgeting” has become synonymous with “doing without.” Budgeting, though, doesn’t mean sacrificing. Sure, if you’re trying to accomplish certain financial goals, you may have to scrimp and save. However, by definition, budgeting simply means estimating your income and expenses over a certain period of time – E.g. monthly, quarterly, yearly. Typically, people create monthly budgets, but those monthly budgets can predict a year’s worth of net gains or losses.
Now that you’ve totaled your monthly income and expenses, you can now see the money left over each month. Is the amount enough to save or to invest in your new business? If you’re spending as much as you’re making, it’s time to make a change. Avoid frivolous expenses. Save. Invest. Create a nest egg on top of your emergency fund. A business’s financial need does not constitute a personal emergency, so you need to save cash in addition to that emergency fund. Ultimately, your goal is to increase your personal financial sustainability to weather financial storms that are bound to come about in your business.
But how do you increase your personal financial sustainability before your launch your business? Your personal income and expenses will determine what you can and can’t do, but I typically recommend taking the following actions:
Take a look at every expense you recorded in your budget. Then, tighten your financial belt. Can you eat out less and eat at home more often? Can you buy generic brands at the grocery store to save $20 each week? Will switching insurance companies save you money on home and auto insurance? Are less costly options available to you for phone, Internet, and cable?
Before launching a new business (and sometimes while you’re launching a new business), it’s important to keep your current job. Most likely, it’s stable, whereas, your start-up is risky. You may have to start the new business slowly or hire someone to manage it while you work your “regular” job. However, the more stable your personal finances remain, the better chance your business has of withstanding meager times.
If you’ve decreased your expenses but remain cash negative or cash poor, you may even need to consider taking on an additional job or part-time job. It doesn’t have to be glamorous. It just has to help you save up enough cash to survive your business’s start-up phase.
If you realize that you’re paying high-interest rates that are driving up your monthly expenses, improving your credit score can help you consolidate or refinance your debts into loans with lower interest rates to lower your monthly payments. Improving your credit score can also improve your chances of getting a line of credit or operating loan for your start-up business.
RELATED ARTICLE: To understand what factors increase or decrease your credit score, check out my post: Credit Card Myths.
Minimizing your expenses and increasing your income will help you save money. However, if you want to start your business with a significant cash cushion and with as little risk as possible, you’ll want to find extra cash without taking out loans. Consider selling some of your assets. Do you really need 3 TV’s? Don’t spend the money you make from your second job; save every penny of it you can. Do whatever it takes to save money and to keep money coming into your personal accounts while you’re beginning your business.
If you’re delaying the start of your business to strengthen your cash security net, consider buying equipment you’ll need for your business a little at a time. Maybe you could buy a computer one month and a printer the next. Perhaps you could start buying office chairs or desks here and there. The more you can buy without taking out loans, the better position your business will be in when you launch it.
While you’re preparing your finances to start a business, you may want to go out and get some experience. Maybe you do some AB-testing and take a trial run on your business before you ever start it. See what works and what doesn’t before you sink all of your money into your start-up.
If you want to know how much cash your business may need, talk to a banker. Ask him how much you must have saved in the bank before you can get a business loan. Ask you if your assets are strong enough to get a business loan or line of credit. See if you even have a chance of getting a loan.
Writing down, or projecting, your income and expenses can be quite liberating. You can use a budget as a tool to develop a “plan of action,” to achieve “quantified objectives,” and to cope with “foreseeable adverse situations.” A budget allows you to account for every dollar and every cent. If you can see how much money you’re earning versus how much money you’re spending, you can make necessary adjustments. That’s liberating. You don’t have to be a slave to fear about whether or not you have enough money in the bank to cover unknown or unexpected expenditures. You don’t have to work harder to earn more money and then wonder where all your money’s going.
Click here to download the Financially Simple Personal Budget template.
Ultimately, you want to use a personal budget as a tool to prepare yourself for the costs of business ownership. If you don’t expect your start-up business to provide you with a sustainable income for one to three years, you have to budget your personal finances accordingly. Notice that I just turned that “budget” (noun) into “budget” (verb). Now that you have recorded your predicted income and expenses in a “budget” (noun), you must you must “budget” (verb) your money to ensure your income exceeds your expenses. Budgeting protects your personal financial health so that you can remain financially solvent during your business’s time of insolvency.
For information about how to build a business budget, I recommend Five Steps Required to Build a Business Budget for Startups.
After you have built your budget and used it to get your personal finances in order, the next step is to enlist professionals to help you with the aspects of business you can’t (or shouldn’t) handle by yourself.