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 the adjustments that are needed to increase your net worth. While you’re examining and increasing your net worth, you will also need to increase your personal cash flow. Not only do you want to increase your assets and decrease liabilities, but you also want to increase income while decreasing expenses. Don’t simply prepare your financial statement. Build your personal budget. Then, use what you learn to decide what changes you’ll need to make to your personal finances before starting your business.
00:31 – Preparing your personal finances for starting a business
02:32 – Update your personal financial statement
05:55 – Do you have an emergency fund?
07:46 – Do you have the proper insurance?
11:47 – Do you have your legal documents?
13:55 – Have you eliminated your unsecured debt?
16:55 – Update your budget
17:14 – Minimise your expenses
18:16 – Consider a second income while starting your business
20:22 – Do you need to improve your credit score?
21:29 – Business Analysis – Do you need more than normal funds to start?
23:23 – Can you start buying business equipment beforehand?
23:57 – Do you need to do a trial run on the business?
24:35 – Have you spoken with a Banker to determine if lending is possible?
25:22 – Key Notes
25:31 – Do not intermingle personal and business funds
26:12 – Set aside tax money
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 have a negative view of making a budget because the word, “budgeting,” has become synonymous with “doing without.” However, budgeting 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, or yearly. Typically, people create monthly budgets, but those monthly budgets can predict a year’s worth of net gains or losses.
Once you’ve totaled your monthly income and expenses, you can now see the money that is 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. Keep in mind that a business’ 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, enabling you to weather the 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. However, I typically recommend taking the following actions:
Take a look at every expense you’ve 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? Would switching insurance companies save you money on home and auto insurance? Are there more affordable options available to you for phone, Internet, and cable? Every little bit adds up and oftentimes, small changes can make a big difference.
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 probably pretty 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: Uncovering The Factors That Impact Your Credit Score – 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, taking 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 TVs? 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 loans, the better position your business will be in when it launches.
While you’re preparing your finances to start a business, you may want to go out and get some experience. Taking the opportunity to conduct some AB-testing and take a trial run on your business before you ever start it can give you some valuable insight and experience. Use what you’ve learned to make educated decisions on 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. Find out if your assets are strong enough to get a business loan or line of credit. Take advice regarding steps to improve your odds.
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 worry about whether you have enough money in the bank to cover unexpected expenses. Instead, your budget allows you to take control of your financial life, moving it in the direction that you want it to go.
Additional Resources: 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 “budget” the noun into “budget” the verb. Now that you have recorded your predicted income and expenses in a “budget” (noun), 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’ time of insolvency.
Further Learning: Building a Business Budget – Five Steps Required to Build a Business Budget for Startups.
Once you’ve built your budget, using it to get your personal finances in order, the next step is to enlist business professionals to help you with the aspects of your company that you can’t—or shouldn’t—handle by yourself. Folks, life is hard. I know this, but life is good. Life can be frustrating but preparing to start your business doesn’t have to be. If we work on our personal finances before starting a business, we can make our lives, at least, financially simple.
Need help getting your personal finances in order so you can take the next step toward your BIG IDEA? The Financially Simple team is here to help. Contact us, today!