Starting a business is actually not as difficult as it may seem. These days, you can turn your ideas and skills into a business with very little cash or resources. Since entrepreneurship is within reach, many people are jumping on board and hoping to accomplish their financial and lifestyle goals. Unfortunately, many quit their jobs to pursue their dreams without really considering essential financial aspects…and this can have long lasting effects.
Getting Finances In Order
Starting a business comes with an expectation to make money. However, making money doesn’t always happen overnight. It can take months or even years to consistently generate enough to cover your operational expenses and personal needs. For this reason, it’s best to ensure that your finances are in order before starting a business (especially if you’re planning to leave a full-time job).
When you quit your job, your business becomes your primary source of income. Whatever you earn from sales will have to be enough to cover operational expenses and your household budget. The best way to reduce your out-of-pocket costs is to decrease your debt. If you’re spending less on loans, credit cards, and other accounts, you can use more of your business earnings for what matters.
While you don’t have to be debt-free to start a business, a good rule of thumb is that you should try to ensure that your debt-to-income ratio is at or below 35%.
Entrepreneurs need to know how to budget their company and personal finances. Budgeting gives you a detailed picture of your income and expenses while helping you to organize and manage your finances to ensure you can maintain operations and sustain a decent quality of life. An adequate budget can help you monitor your spending, reduce debts, increase savings, and make sound purchasing and investment decisions.
To create a budget, you’ll need to gather your bills, expenses, receipts, and financial statements in order to determine how much you spend every month. Next, you’ll want to create a limit for each cost (for example, $50/month for subscription services). Every pay cycle, you’ll need to divide your paycheck into spending categories to ensure you have enough money to cover each expense.
Budgeting takes practice, but it gets easier with time. If you need assistance, you can consider options like ONE’s Pockets. ONE is a fintech bank that offers digital banking solutions. Pockets are sub-accounts that you can customize to correlate with your budget. You can schedule automatic transfers and complete transactions from designated Pockets to ensure you stay on budget.
Any entrepreneur can tell you that your income can fluctuate from one month to the next. When this happens, you’ll still have operational and personal expenses that need to be paid. That’s why having a sizable nest egg is essential. You should have at least three to six months’ worth of expenses in an account (one account for personal expenses and one for the business). If you do and a month arises when business is slow, you will still have what you need to survive.
However, trying to save a considerable amount of money can take years. Luckily, there are some things you can do to speed up your efforts. You can cut back on unnecessary spending, sell things you no longer use, add monetary gifts or sizable checks (tax refunds, annual bonuses, etc.) to savings, take on a side gig, and place your funds in an interest-bearing account.
Becoming an entrepreneur has its advantages, but comes with challenges to achieve financial maturity. It’s essential to ensure that you’ve considered all of the risks. From there, you’ll be ready to take a leap of faith and watch your entrepreneurial dreams come true.