Everything we do involves taking risks and for many people the prospect of leaving employment and starting up a business can feel like a step too far. For most people the primary concern and reservation will, quite properly, revolve around income. Can I earn a living?
The best way of alleviating your concerns is to prepare both a personal and business budget, and plan how you can make it work. Take a pessimistic view on how long it might take for your business to produce sufficient cash flow for you to start drawing significant income, and then assess whether you can meet your personal obligations in the meantime.
Preparing a personal budget is essentially a review of your household spending. You need to review all the costs that you (and your family) incur; the usual things like the mortgage, household and car running costs etc. Against these costs you need to identify all your sources of income, to include to what extent you are prepared to use savings and investments.
This will allow you to look radically at your options for balancing your personal budget in the short term.
To help, here are some potential sources of personal finance while you establish your business:
- Use redundancy payments;
- Family savings;
- Family or friends support;
- Maintain existing employment whilst starting up;
- Other part-time employment;
- Your partner earnings support the family;
- Bank support e.g. overdraft facility, bank loans;
- Car sale or re-finance;
- Release funds from any personal spare assets;
- Mortgage holidays by arrangement with your lender;
- Local enterprise or community organisation; and
- External investment in the business to reduce your own commitment.
Developing your personal plan might change your perspective on things. It may even lead you to seek an active partner to help finance the business, or a silent investor. Family, friends, business colleagues or a business mentor can be a great source of financial and moral support.
Whilst personal risk assessment is important, the business itself is subject to a whole range of risk factors that you also need to ward against. Understanding what the risks are and how you can manage your business around them is sensible if not essential.
So, you might find it helpful to consult a specialised business insurance broker to help you assess your insurance needs. You will be surprised at some of the protections that are available.
In the early days, keep your financial commitments low and your flexibility high to allow you to confirm the key elements of your financial plan. Make a provision for some bad debts, and please, please don’t overexpose yourself to any single one!
Be ambitious but financially prudent – the two are mutually compatible. If you have to give a personal guarantee to your bank, ensure that there are strict criteria that will allow you to remove it at the earliest possible time.
Be aware of your need for formal contracts with your business connections and ensure you understand the detail. Keeping separate personal and business finances and budgets is very beneficial, not just in the startup phase – but always. They are separate entities and taking a thorough approach to reviewing the risks for each and looking for solutions as well identifying possible problems, will set you on your new business path with your eyes wide open and with greater prospects of success.
Chris Garden and Catherine Blackburn are the authors of “Employee to Entrepreneur” (published by Pearson in January 2013).