Preparing your Finances when starting your own business
It’s a leap of faith starting your own business. There is always a financial reason not to; everyone has bills to pay and it doesn’t matter how much money you put by it never feels enough until your business is making money.
You are right to be cautious before having your own business however it’s about making an informed leap of faith. As well as having the right business idea it needs to be the right time.
When I first launched my business, we made sacrifices to keep the business running such as having one car, staying in our first house for longer than planned to keep a low mortgage, and then renting before being secure enough to buy the forever home.
I considered the steps below when I launched my business and still refer to these steps to keep my personal finances in check and financially grounded!
Step one: Explore if the business can really make money
Lots of new businesses fail, so it’s important that you really think before acting and ensure your business idea is solid and realistic.
Questions to ask yourself before taking the leap of faith
- Do you fully understand the business costs you will encounter? Write down and understand exactly how much money you need to generate to make a profit. I spoke to lots of people who run successful businesses to really understand what they do and how they do it. They talked to me about things I hadn’t even thought about.
- Are you debt free or close to it? Well done if you are! If not investigate if you are paying back a credit card or loan at the best possible rate? I had a loan and a credit card so I consolidated my debt which resulted in a smaller monthly payment that was easier to make when I first launched my business.
- Whats your credit score? I found out stuff I didn’t realise such as being on the electoral roll improved my credit rating and how one late payment had impacted my credit score… I simply forgot to pay something once and it impacted me.
- Have you got savings? In case of a cash shortage can you, or someone close to you, cover expenses? If you haven’t already start saving today!
Step two: Understand your financial position
Create a financial statement for yourself. This contains an itemised list of your major sources of income and expenses.
It’s also important to consider your personal net worth – in other words how much you have in assets if you were to pay everything off you owe. If anything, this gives you the peace of mind that you are in a state of financial growth
Once you understand your financial position, set yourself a financial target. For instance, how much you want to spend, how much you want to save and earn etc.
My financial target is the 50/30/20 rule that was designed by Harvard Bankruptcy expert Elizabeth Warren – US Senator from Massachusetts. My financial target is as follows:
50% Needs – Groceries, Housing, Utilities, Health insurance and car payments etc
30% Wants – Shopping, Dining out and hobbies etc
20% Savings – Savings
Step three: Focus on financial growth
It’s important to develop your relationship with money the more financially successful you become. I ask myself three questions to ensure I am making the most of all the opportunities around me:
- How could I increase my earnings?
- How can I save money and still have fun?
- Where can I invest my money?
I write down and discuss with my partner all possibilities, however small or obscure, and then make the best ideas into actions.
Here are some top tips I learn from financial possibility thinking:
- Have a financial calendar on your phone so you pay things on time
- Have a second personal account for your personal spending budget or use cash to pay for things. Write down each day what you have bought to remind you of how much things cost rather than just waving a card in front of a machine
- Have savings so you have more financial choices
- Have a spending mantra “Only buy something if you love it 10 out of 10”
- Discuss your money with a friend or financial advisor to get a neutral perceptive over your spending
- Ensure your mortgage is less than 25% of what you earn
- Shop around to make sure you get the best price on a purchase
Step four: Review the plan over and over
It’s important when you face a change in circumstance to revisit the plan and make sure it is the best course of action for the current moment in time. Remember things change and companies want your business, so interest rates change and new deals become available to you
Enjoy the leap of faith and keep those finances in check!
Read our article about how you can better manage your mindset around money when running your own business.
High & Wise