6 Ways to Prepare Financially Before Starting your Business
One of the most important areas to focus on (before you hang out your shingle) is the financial steps you need to take when beginning your business. Your financial foundation can sometimes be the difference between succeeding or failing, so it is vital to make this foundation strong:
1. Calculate Your Startup Costs
Startup costs are one of the biggest expenses you will incur--and they happen typically before you have even sold your first product or service. Business owners will spend approximately $30,000 to start a business according to the Small Business Association (though this varies depending on the type of business and its geographic location).
For example, brick and mortars cost significantly more to open than e-commerce stores; businesses that require a lot of licenses and certifications can also be costly.
Your startup costs might include
- Rent or mortgage down payments,
- salaries,
- website development,
- advertising,
- permits,
- accounting/legal fees and
- business filing fees.
2. Determine Required Living Expenses
Since you may not see a profit for a while, it is important to have enough to set aside for your basic living expenses for the time period before the business makes money.
If you are leaving a job to start your new business, you will also need to take into consideration the cost of health care and other benefits which will no longer be covered by your employer. A good rule of thumb is to have at least six months’ living expenses saved before quitting a salaried job.
Your financial planner can help you figure out how much you need.
3. Get Your Credit in Order
While you will be able to borrow under the business name when you are starting out, initial funding--with loans and credit cards--will be based on your personal credit. Even after being established for a time, many banks will still consider the owner's credit as a deciding factor in lending, as well as the interest rate.
Take stock of your assets, such as the equity in your home, and explore ways to raise your credit score. Pay down as much debt as you safely can, as the amount of debt you carry can significantly affect your score.
Again, a financial counselor can help here.
4. Determine Your Tax Burden
Unfortunately, many entrepreneurs starting a small business forget to take the business tax burden into account when determining if their business has the potential to be profitable. You will need to consider such issues as
- self-employment tax,
- federal, state and local taxes and
- payroll taxes.
These all need to be taken into consideration when determining how to classify your business, as well as your ability to hire employees and the amount you can pay them.
5. Assess Your Profit Potential
Fully assess the potential of your business before embarking on it. Not all ideas can form a business, and it is essential to assess income and sales projections to make sure that once your business starts making money, your income will cover basic expenses.
You can determine this potential by performing market research identifying possible customers, current competition and how much it will cost you to compete with them.
6. Determine How You Will Fund Your Business
You will need to determine what methods of funding you will use, not only to start your business, but to keep it going and help it grow. Some of the most common sources of funding include:
- personal savings
- loans from family and friends
- small business loans
- outside investors
Carefully consider which methods can help your company grow and how much they will cost in terms of interest or equity.
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