How to Start Your Own Business - Righting Your Financial Ship

One of the major reasons for small business failure is launching with insufficient capital. Some of us started our businesses of necessity, after finishing school, like my brother Karl. He wasn’t happy with the offers he received after passing the Massachusetts Bar, so he partnered with one of his classmates to start their own law firm. They are now married with four children, a flourishing practice and a four bedroom 3600 square foot home with a pool in the Boston suburbs. They thrived because of their skills, not because of deep pockets. Beginning your own business is as demanding as a marathon. It’s hard to succeed unless you prepare for it. Let’s assume that you are gainfully employed and are making the leap because of the personal freedom and flexibility that owning your own shop provides. There are key steps you need to take to get your financial house in order, good precepts to follow just for financial survival in these times.

Instructions

Difficulty: Easy

1. Tabulate your annual expenses.
   Many people live from paycheck to paycheck and have no clear sense as to how they spend their money. Cash transactions trip up clear accounting. If you haven’t done this before ask for and get receipts. Use a debit card for a month. Draw up a complete list of where you money goes. Consider everything, from your rent or mortgage to your daily dose of Starbucks Coffee. Take a hard look and record it. We’ll discuss accounting software later, but at the very least, record your expenses on a spread sheet like MS Excel.
2. Add up all your income sources.
   Include interest, investments, rent, and your paycheck. What do you make at work? What do you take home? If you routinely get a big refund every year, you should consider going to a larger number of withholding allowances on your IRS W-4 form, from one to two for example. Remember that is an interest free loan that you give the government every year. Don’t get greedy and jump from one to nine. The last thing you need to do when April 15th rolls around is to come up short.
3. Budget.
   This is the tough part. Where can you trim? Do you really need a barista to supply your morning brew? Starbucks can get 52 espressos from a single pound of coffee. Why not buy coffee by the pound, grind it yourself and bring it on your commute in a travel cup? I would never tell you to stop going to movies at $8.75 a ticket plus parking, but for $19.95 a month through Netflix, i rent as many DVD's as I can watch. Brown bagging lunch four out of five days a week can save you $1500 a year. You want your expenses to be governed by how much you earn.
4. Establish a Cash Reserve
   Once you’ve plugged the leaks in your budget, it’s time to pay yourself. Start to set aside a fixed payment out of every paycheck to savings. The least you should save is 5% of gross salary; ideally it should be closer to 10%. You want a liquid cash reserve of at least three months of personal expenses in savings.
   
   Shop for banks. The difference in savings interest can be significant. ING Direct, for example pays substantially more than the Bank of America.
   
   If you’ve already met your cash reserve goal, then continue to put away more money in a separate account. This will become the seed money for your business. Your reserve should be sacrosanct. Although it will earn interest for you, it should be kept for emergencies. When your business starts to earn money, you’ll resume saving a percentage, putting it in a investment hierarchy we’ll discuss later.