There comes a point when many people wonder whether they should strike out on their own and start their own business. Approximately 14 percent of working-age people in the U.S. are entrepreneurs. But while the siren song of entrepreneurship may sound sweet to those laboring at the oars as wage-earning employees, careful planning is needed to ensure you don’t end up dashed upon the rocks.
When I work with clients who are making a transition from being an employee to becoming a business owner, I counsel them on two things. First, as a financial professional, I work with them on the financial side of the decision. But equally important are the non-financial considerations.
The Financial Side of Starting Your Own Business
From a financial perspective, I tell clients the first step in launching a business is organizing all of their finances and seeing if business ownership is a financially viable option. The business may be operating at a loss for the first couple of years, and people need to understand how that will impact their personal finances.
It’s a matter of understanding your own personal finances, compared to where you want to be five to ten years down the road from a business perspective. I suggest doing research on similar businesses so that they get an understanding of the revenue and profit margins that are normal for that sort of business. This enables them to make realistic revenue forecasts for the first few years. Then, they should think about what sort of expenses are involved.
It may be that the income from the business will be negative for the first few years and that it will be pulling money out of your pockets rather than putting it in. Ask yourself if you can withstand such an ongoing operating loss, based on your own personal finances, or would that force you dangerously into debt? Are there assets that can help smooth the transition?
Owning your own business is a major financial commitment, one you should go into with your eyes open. You’ll be ahead of the game by doing your homework. This includes knowing what to expect in terms of revenue and profit, and how it will affect your personal finances. Expect the best, but prepare for the worst.
The Non-Financial Considerations
As for the non-financial considerations, I ask my clients about their passion for the business. Are they ready to live and breathe, eat and sleep that business? People underestimate the amount of work it will take for a business to start turning a profit consistently, and the ones who succeed have a passion for it, a drive to succeed at the business no matter what.
It is also important to get buy-in from your spouse or significant other before you strike out on your own. If there’s somebody else in the picture, there must be support from the other person at the outset. If there’s a cash flow problem –either in the business or in the household finances – it may put strain on the relationship.
I’ve seen plenty of people start their own businesses when they realize their current employment situation is coming to a natural end. It is a natural next step for many people, and it can be attractive to gain a greater degree of control over your own financial destiny. Still, it pays to evaluate the business opportunity carefully before proceeding.
This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your client’s situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.