5 Ways To Get Financially Fit For Starting Your Own Company

Making the leap from full-time employment — or even a side hustle — to start your own business is a big move. When you prepare for entrepreneurship, you gain the freedom to set your own hours and be your own boss, yet assume total responsibility for your financial future.

Entrepreneurs have their work cut out for them, and there are plenty of reasons why startups and companies fail. So before you take the plunge, it’s important to take the necessary financial steps to lay a good foundation.

Be Financially and Mentally Prepared

Starting a business can be daunting. What starts out as a good idea can quickly crumble if you don’t have the right mental and financial mindset. Becoming an entrepreneur takes time, self-confidence and a healthy dose of fearlessness.

We’ve seen the glamorous side of entrepreneurship: stories of self-made millionaires who started companies out of basements and went on to run successful businesses.

But what about those that never made it off the ground or lost their one big client only to find themselves back in the unemployment line — or worse — begging for their old job back.

As entrepreneurs, we know it’s not that simple, and very few businesses are cash flow positive on day one. To avoid the pitfalls of poor financial business planning you have to be financially and mentally prepared for what lies ahead.

Know Your Why

When you prepare for entrepreneurship, it’s important to know the reason why you started (or plan to start) your company in the first place. As a founder, you’ll certainly run into roadblocks.

The reason why you want to start a business must be more than getting away from a bad boss or long commutes.

Ideally, you’ve identified a problem and have stumbled upon a solution to that problem — something that is not currently available on the market. And then, you’ve validated that idea to avoid building something nobody wants.

While we’d all like to think that our business ideas are amazing — hence the number of people who start businesses each year — it’s hard to handle setbacks when they arise.

The reality is that money isn’t enough. And if you’re not 100 percent committed to your “why,” you won’t be passionate enough to stay the course when things get rough.

Andrew Wilkinson, founder of MetaLab and Flow says that “The siren call for many entrepreneurs isn’t money, it’s freedom. The freedom to chart your own path, the freedom to build what you want with the people you love.”

Simon Sinek gives a brilliant Ted talk on how successful leaders start with the question “why.”

With that in mind, here are five tips to help you become more financially prepared to start a business – and become the entrepreneur you’ve always dreamed of.

1. Create an emergency fund

The risks of starting a business without a safety net are well known. Odds are, business won’t be booming for months, and as a new business owner, you’ll likely have to deal with irregular income throughout the year.

I hate to be the bearer of bad news, but the U.S. Bureau of Labor Statistics reports that approximately one-third of all businesses fail within the first two years.

Accordingly, you should start building an emergency fund that covers up to six months to a year of personal expenses, including housing, food, insurance, utilities and the welfare of any dependents.

How much you should save depends on your current budget and household responsibilities. Check out this Emergency Fund calculator to determine how much money to set aside. You can also find great information online for setting up a budget.

2. Keep personal and business money separate

When starting a business, it’s important to separate your personal and business finances — particularly when it comes to expenses.

We get it.

You and your business are so interconnected that if often feels like you’re joined at the hip. Yet, the sooner you realize the importance of keeping things separate, the better off you’ll be.

Not only can it help you minimize risk and legal liability, but you’ll also avoid any unnecessary confusion that may result from the co-mingling of your funds.

For starters, set up separate checking accounts for business and personal use. Be diligent in paying for business purchases from the business account and personal purchases from the personal account.

Do the same with credit cards, and be sure not to mix the two. Using business funds for personal expenses or vice versa can leave your personal assets open to a lawsuit or complications with your business.

There are several reasons for this:

• • It keeps your taxes straight during tax season when you are figuring out deductions.
  • It gives your business more credibility and professionalism. You wouldn’t take someone’s business very seriously if you wrote a check to them personally, rather than to their business, would you?
  • You are protected from personal liability should something bad happen down the road.
  • It eliminates the burden of your business’s financials on your personal accounts.

Next, you’ll need to have a system in place to manage your business finances and track your income and expenses. There is a range of products on the market, from basic and free to highly customizable that can help with all sorts of tasks.

Financial management platforms like Freshbooks, QuickBooks or Xero can help you track income and expenses. Putting these systems in place before you start will help keep your finances in check without eating up too much of your time later.

3. Prepare for entrepreneurship by starting part-time

It’s no secret that starting a business puts a strain on your finances. When you’re ready to take the leap into entrepreneurship, consider whether you have the resources, support and savings to do so.

Otherwise, you may need to scale back work on your new company by working part-time — unless, of course, you’re willing to dedicate nights and weekends (aka “the side hustle”) — before quitting to launch a business.

If you’ve already left a full-time job, or the one you have does not allow for part-time work, consider decreasing your expenses. Your cost-cutting tactics don’t have to be elaborate, they just have to help you save up enough cash to survive your first year in business.

4. Consult with experienced professionals

You can read all the blogs in the world, but if you’re serious about setting up your business for success, you’ll want to consult with an experienced professional to help protect you financially, and legally, in the long run. For instance:

• A lawyer can provide guidance on how to structure your company and inform you of local laws that could positively or negatively impact your business.
• An accountant can review your long term financial goals and provide direction on the most tax effective ways of getting there.
• An insurance agent or broker can tell you about the different types of insurance you can use to limit your liability.

What I’ve witnessed is that a financial or legal expert can help you identify any gaps or blind spots in your planning and lead you to the appropriate resources. Some offer free or low-cost consultations; you can then choose to go the DIY route or engage with the professional further.

5. Have a solid customer acquisition strategy

Have you figured out how your plan to acquire customers? Or do you already have customers or clients in place to help ease the transition to self-employment?

Whether you plan to sell widgets or services, without an existing or predictable client base, it will become increasingly challenging to grow your business and scale. What’s more, building a pipeline of customers takes time. You may have a fascinating idea, product or service, yet if no one knows about it you’ll just be working in vain.

Consider devising and implementing a marketing strategy in addition to a customer acquisition plan so that you have projects or warm leads lined up when you officially launch. Once you’ve identified how to acquire customers, your company has a greater chance of surviving.

In closing, starting a business is no easy feat. With proper financial planning and an assessment of your personal situation, you can prepare for entrepreneurship and be on your way to running a sustainable and profitable business.

Nicole Johnson is the Founder & CEO of NicJohn Media, a digital marketing agency based in Oakland, CA, that helps individuals and companies tell better stories to grow their brand in the digital age. She’s a former marketing professional at BlackRock, the world’s largest asset manager guiding individuals, financial professionals and institutions in building better financial futures, and was head of content, thought leadership, and social media at fintech cloud computing company, Hearsay Systems, before starting her own venture. Connect with Nicole on Twitter @nicjohnmedia and Instagram @njmedia.