Financially Preparing For Entrepreneurship

If you are serious about working for yourself there are several actions you have to take so you have the best chance of succeeding in your business. One of those is financially preparing for entrepreneurship. Today I discuss the steps I took after doing great amount of research.

Financially Preparing For Entrepreneurship: Reduce Your Personal Debt

Debt is a yoke that holds us back from accomplishing various goals and desires. Thus, we spend more time and energy on how to deal with our debt than on other tasks. In business, where time is money, this could negatively affect our business. So when it comes to financially preparing for entrepreneurship you must make a plan now to reduce your debt as much as possible. If you can pay it all off that’s great. However, that isn’t required for entrepreneurship, nor is it is feasible for some people.

I started reducing my debt years ago. I finally achieved my goal of being completely debt-free in July 2019. As a result of that I saved more and more of my money which really helped me when I started my business in January 2021. By that time I did have a mortgage payment but it was quite reasonable so I was’t worried about paying that.

There are many ways to reduce your debt. The most popular methods are the Debt-Snowball and the Debt-Avalanche Methods.

With the Debt-Snowball Method, you pay off your smallest debt first while paying the minimum payments for your other debts. Once you pay off the smallest balance, then you pay off the next smallest debt with the additional money you have after paying off the old creditor. The pro of this method is that you see results fast by paying off small debts. However, you will pay more interest over time which is a con.

Regarding the Debt-Avalanche Method, you pay off the debt with the highest interest rate first. Thus, you save money by not paying more interest. However, this method may take longer for you to get out of debt if the debt with the highest interest rate has a large balance.

Whatever method you choose is up to you. I chose the Debt-Snowball method because I wanted to rid myself of the smallest debts first.

Finally, the main reason to reduce your debt before going into business is so you don’t rush to make your business profitable. With little to no debt, you will have less expenses to pay. Most startups or new businesses are not profitable within the first year. Actually, it takes about 2 to 3 years for most new businesses to make a profit. Even if your business is profitable quickly, you can reinvest those profits into the business to grow it bigger than servicing your debts.

Financially Preparing For Entrepreneurship: Create A Lean Personal Budget Now

Some new self-employed individuals continue living on their “employee” personal budget which is wrong. This is wrong because you don’t have a paycheck coming in on a schedule. As an entrepreneur it can take weeks to months to get paid, depending on your service or industry. A good way when it comes to financially preparing for entrepreneurship is to live on a lean personal budget now.

Now this is a hard practice to implement. I myself have tried twice before and gave up. However, I didn’t give up and learned from my mistakes. Turns out I was made too strict of a budget and couldn’t live by it. Don’t repeat my mistake.

It’s important to live leaner now than doing so later to not only determine your budget, but to understand how you or your family handles living on less money. Maybe you need to allocate more funds to groceries but decrease your entertainment budget. You won’t know until you try.

Finally, Estimate Your Burn Rate

A final way to financially preparing for entrepreneurship is to estimate how much your burn rate will be.

The burn rate is typically used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations. It is a measure of negative cash flow.

Thus, if you are using your savings or borrowing money to operate your company you will have an idea how long that money will last. This is also consider your runway. The less runway you have, the faster you must push the airplane so it can fly and not crash. It’s best to have the longest runway possible, just in case something goes wrong.

I ran several estimates on my burn rate. In those calculations I include not only my business expenses, but my personal expenses too. I’m using my savings as a guide. Since I will work on my own, and I’m going to setup my business as a Single-Member LLC, I can run the figures this way. However, if you are going to have employees in a LLC or Corporation, then you need to separate your personal and business burn rates.

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100gecs

Great article. As someone who works in an Accounting Practice, these are common issues I see new business owners facing.

[…] for my new business came to me in late 2019 and I worked on it slowly from that time through 2020. I knew starting my own business was risky and that I needed money to live and run the business. So I made a plan to save up as much money as I could from my job. I didn’t have any debt, beside […]

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