Owning a business is great. You have unlimited earning potential, get to be your own boss, and live outside a gray cubicle. It is the American Dream. Except when it isn’t. The dream can quickly become the American Nightmare when the bills appear faster than clients’ payments. It plays out as a vicious cycle, but there are ways to prepare your personal and professional finances for the unpredictability of self-employment.
- Budget, budget, budget. You need both personal and business budgets. No excuses, no delays. If you are even thinking of going into business you need to have WRITTEN accounts of money coming in and money going out. Budgets in your head, general ideas about cash flow, and a feeling that it will all work itself out in the end don’t count. Realistic expectations about how much money you need to live on and what it will take for your business to be profitable are a must. If your personal or professional overhead is too high, you’ll feel the pinch financially. Make sure to “zero out” your personal and business budgets each month. This means you account for each and every dollar you earn by allocating it to a category in your budget such as “Savings” or “Groceries”. It does NOT mean you have to spend each dollar. It also does not mean creating a catch-all category in your budget such as “Miscellaneous.” The more specific you are with your categories the more control you’ll have over your money. Budgeting is tiring at first, but after a while, you’ll be able to plug the numbers in while you sleep.
- Educate your expectations. Surf and turf meals will likely be replaced by ramen noodles and soup for a while, even if you plan to work full- or part-time while you start your business. Living rich when you’re not is a surefire way to stay poor. While it may seem like everyone else is living the good life as you sip your soup dinner for the umpteenth night in a row, remind yourself why you became a business owner in the first place. You are reaching high goals, and that’s something to be proud of, no matter what is on tonight’s menu.
- Keep people in the loop. There is no need to reveal more about your finances than what makes you comfortable. But don’t be ashamed to tell friends and family that while you turn your dream into a reality you need to cut back on entertainment. Suggest movie nights in, meet-ups at coffee houses instead of full-scale restaurants, or free activities going on around town. This was something I didn’t do well when I started my business. I was the only one jumping into self-employment, and I felt too ashamed to tell people I didn’t have the budget to keep up with their pace. Looking back I know that was silly. My friends wanted to help me. They wanted to be a part of my experience. Your friends do too. Remember, your real friends will support you all the way.
- Stockpile cash. You MUST have savings for yourself AND your business. The more prepared you are with emergency savings, the more likely you’ll make sound decisions. Without savings, each small emergency will feel like the end of the world, and that’s bad for business. The general rule of thumb is to have at least 3-6 months of personal expenses covered. You may go so far as to cover up to one year, if you are in a volatile business and are able to save that much. For business savings you can calculate 25%-50% of your annual operating costs as a starting point. Adjust up or down for the amount you think you’ll need for business-related rainy days. You may need to keep your day job longer or work an extra shift to stockpile that much cash. Having a budget will also help. Even if you think you’ll never need the money, the minute you do, your efforts will have paid off.
Owning a business means learning to deal with unpredictability. But managing your finances responsibly is a step toward ensuring your dream doesn’t turn into a nightmare. Emergencies happen but with forethought, you can set yourself apart from the countless businesses that collapse because of poor financial planning.
By day Morgan Leu Parkhurst helps individuals put the pieces of their marketing puzzles together. By night she teaches marketing to entrepreneurs. Morgan is also producer of the Magnetic Biz-Building Online Summit. Connect with her on LinkedIn.