Some people dream of the day they can quit their job and start their own business. Unfortunately, many people never consider the financial ramifications. Instead, they think the money will be the same because they have a great business idea. Nothing could be further from the truth.
There are many details to consider before you quit your job and start a business. This may end up being the best move you ever make, but you need to make sure your finances are in order, first.
Below are five things to consider before you jump ship and start your own company:
1. Weigh your current income against the potential with your new venture. Will you eventually be able to earn as much as you did at your past job? Do you have the ability to earn more? While there is nothing wrong with making less money, you need to be prepared for this. Would a lower income support your current lifestyle?
The bottom line is simple: if you are going to start your own business, the potential to earn as much or more than your past gig is a very important factor to consider. If it will likely be less than this, be honest with yourself if that is OK with you and your family.
2. How long will it take to generate income? There is no surefire way to answer this question, but you definitely need an idea of the time line that you are up against. Will you be able to earn the same amount within a couple of months? A couple of years? Obviously, the quicker you generate income (even if only a little), the better off you are going to be.
The best way to answer this question is to research the industry in which you are getting involved, while also having a solid business and marketing plan. Better yet, if you can begin working on your side business while working at your full-time job, you can get a great idea of the business’ potential and even start creating some income before you quit.
3. An emergency fund is of utmost importance. If you have money in the bank, you may feel comfortable working without an income for an extended period of time. As a general rule of thumb, try to have an emergency fund that will cover at least six months of expenses. This will give you the time necessary to get your business off the ground and profitable. Simply put, the more money you have in the bank, the less stressed out you will be.
4. Know how much money you need to start your business. Along with this, make sure you know exactly what you are getting into over the long haul. Some businesses do not require much start-up capital; others call for tens of thousands of dollars or more.
Although it would be nice, the initial cash layout may not be all that you need. There is a good chance that your new business will require a steady flow of cash, month after month. If you are not generating income, you must consider other options such as savings, outside funding, and loans from friends and family (this last one is a risky proposition and should be avoided if possible).
5. Do you have the financial backing of a spouse? This can be a pro or con, depending on your situation. Some people are lucky enough to have a spouse earning enough money to keep the family afloat during the start-up phase. On the other side of things, there are those who bring in all the money for their family. In this case, it is much more difficult to dump a steady salary and hope for the best with a new business. Perhaps even more importantly, if you have a spouse, you need to make sure you have their emotional backing as well. Without their support, it could make for a very stressful experience trying to succeed in your business.
Many of the tips above can also be applied to those who are trying to prepare financially for a job loss or bout of unemployment.
Before you give up on your current job and start your own company, make sure to consider the five financial details above. Have you tried to start your own business? Do you have any additional tips to add to the mix?
(photo credit: Phil Sexton)