4 Ways to Financially Prepare to Start Your Own Business

This article was originally written for & published on Business Insider.

Interested in starting your own business? You’re not alone. Applications for business formations have exploded since the fall of 2020, according to Census Bureau data.

I’m certainly biased toward entrepreneurship. It’s the path I chose for myself and found far greater success with than I believe I could have achieved in a more traditional employee role.

But that doesn’t mean starting a business is for everyone, or that if you choose to make the leap, you can skip over the planning phase. If you want to launch your own venture, financially preparing yourself will go a long way toward allowing you to stick around long enough to find your own success.

Here are some points you’ll want to consider.

1. Know where you stand today

Do you have an emergency fund or some kind of cash reserve? You’ll likely want more liquidity

than normal or that you might have maintained previously before you explore entrepreneurship.

Are your consumer debts paid off? If you have a lot of credit card debt or hefty student loans, making a plan to pay those down first might be the right way to go so you don’t have to manage that burden alongside the stresses and challenges of starting a business.

Do you have a lot of financial responsibilities or obligations you need to consider as you launch your business? This might need to factor into your planning, too.

Someone who is single and renting may be able to take more risks than another aspiring entrepreneur who is married, has children, a mortgage, and is currently the main breadwinner of the family.

This isn’t to say you can’t launch a business if your life looks more like the latter, but you may need to do more planning or consider different paths toward your end goal to make sure you don’t take on too much risk that you can’t actually afford.

2. Understand what you need to start

There are a lot of options when it comes to managing startup costs and can range from simply minimizing expenses in every possible way to pitching your idea to venture capitalists who will provide the funding you need to begin.

Can you bootstrap your business and run as lean as possible? Can you fund yourself for a few months until you generate revenue, or will you need to go through investors? Do you have family or friends who are interested in supporting you in some way?

The right avenue depends on a number of factors, but in this financial planning stage, the most important thing is to accurately estimate your upfront costs and identify potential sources of funding for them.

3. Set your runway — and know how to bail

  • Knowing your runway, or how much time your finances will give you to allow your business to reach a profitable state.
  • Knowing when that runway is coming to an end and it’s time to bail to avoid future financial harm.

Understanding your runway can help you plan better and make smarter decisions. For example, if you know you have a cash reserve that will cover your personal needs for six months, then you know your business needs to start producing a profit before then if you want to continue on without incurring debts.

Knowing when that runway might be getting short can also help you evaluate choices like, should you get a part-time job to give your business more time to generate the income you need? Do you need to seek out more investors, or should you look for a partner who can contribute?

Setting this benchmark before you start will also help you stay more objective if you have to make the tough decision to call it quits.

4. Have a Plan B (and C, and probably D, too)

Having at least a Plan B is key so you know how to iterate or pivot if things don’t play out precisely how you expected. If you map out a few different scenarios and how you’ll react to each, you can simply focus on changing as needed if those situations come to pass — and you won’t need to spend time, energy, or money scrambling to figure out what to do.

Looking at all of these factors in combination can help you determine what you need to start your business. That will vary from person to person; perhaps you realize you need a larger emergency fund before you get started, or you need to spend some more time adding contingency planning to your overall strategy before you launch.

Once you know where you stand today and what you’ll need to move forward, you can reverse engineer your way to the ultimate goal: starting your business.

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