Starting a business could be your next step toward financial and personal freedom. But obviously there’s a lot to think about before in dive in.
First of all, is this the lifestyle you want to pursue? Second, do you have enough money to get started? Use the financial essentials below to help you determine whether launching a business makes financial sense for your future.
Look at Your Personal Financial State
If you’re trying to open a company, you’ve probably been setting money aside. Even if they’ve been doing this, most business owners still have to take out a loan, but your savings should substantially reduce the personal financial burden.
Along with evaluating your savings, check the state of your credit. Most entrepreneurs have to take out a business loan to get underway, but if you have bad credit, that step can be a challenge. If your credit ranks below 680, many financial institutions will not grant you a loan.
Thankfully, some online lending options will allow you to take out a startup business loan, even if you have poor credit. But it’s still a smart move to focus on improving your credit anyway.
By making on-time payments and building up your savings, you can erase much of the factors that have negatively affected your credit, which sets you up for a more secure financial future, both in your business and personal life.
Calculate Startup Costs
Once you know how much money you have to work with, calculate where you need to be. The Small Business Administration estimates that the average entrepreneur spends about $30,000 at startup.
The array of typical expenses involved in launching a business includes:
- Rent or mortgage for the building
- Utilities
- Website and other digital expenses
- Marketing, both traditional and digital
- Legal costs of incorporating the business
- Interest on your loans
- Equipment and office supplies
- Insurance, licenses, and permits
- Technological expenses
There may be a few more. You should make a thorough list with the anticipated cost next to each item.
This will determine how much you need to save. Add a contingency of at least 10 percent to the total to make sure you have all your bases covered if an unexpected cost arises.
Determine Living Expenses
Now that you know how much you need to spend on your business, figure out how much you’ll need to live on. You might keep your day job during the initial stages of your startup, but most people find they can’t do both for long.
Eventually, you may quit your day job, even before you start to make a profit with the new operation. Many entrepreneurs go at least a year before they’re able to pay themselves.
It’s always a wise idea to calculate your living expenses before you quit your job. You may want adopt a more frugal lifestyle, because, as mentioned earlier, it can take several months of operation with a new business for the owner to see a paycheck.
This might mean cutting cable and getting used to ramen noodles at meal times, but most business owners find the adjustments are worth it if higher profit potentials could be the end result. Save enough to sustain your lifestyle for at least six months.
Once you’ve hit that mark, quit the day job and go for it!
Understand the Tax Situation
Taxes are much different for small businesses from what they are for individuals. Suddenly you don’t get your taxes removed from your paycheck automatically. You have to pay self-employment taxes, and submit quarterly payments to meet federal and state requirements.
Every January, April, June, and September, you’ll write a substantial check to the IRS for taxes on your anticipated profits. If you miss payments, you may become subject to a hefty fine from the IRS. If you haven’t saved enough for these payments, tax season will be miserable for you.
Assess Your Prospects for Success
While you’re calculating how much it may cost to make your business happen, factor in what you could potentially take home. Begin by evaluating the market, and look at the number of competitors as well as the demand for your products or services.
If you see a lot of firms shutting down in your region, it might not be the best time to launch a new business. If you perceive that you could fill a much-needed gap, however, you’re could be set for success.
The financial considerations are vital, of course, but think as well about the non-financial benefits. For example, you’ll get to be your own boss and enjoy a sense of accomplishment from creating a company from scratch.
For many entrepreneurs, that’s worth a pay cut from what they were making at their previous job. Every operation is different, and only you can determine whether or not it makes good financial sense to start a new one.
You’ll weigh your potential costs and earnings to determine whether your profits stand a decent chance of outweighing your expenses. If your answer appears to be in the affirmative, it could be time to quit your day job and start building your business!