Tips for Surviving Your First Year in Business
Few small businesses make much profit their first year - if they make any profit at all. Even with a low start-up cost business, you will eventually need to invest money into your business in order to grow it by expanding products, services, moving into new geographic territories, or hiring others to help you.
The old, familiar saying is true: It takes money to make money. Rule of Thumb: Have one year of savings already in the bank to live off before you quit your day job. If you are not planning to personally fund your business, raise capital before you launch the business. The promise of money is never as good as cash in your bank account.
Protect Your Marriage by Not Becoming Overprotective About Your Business
If you are married, be honest with your spouse before quitting your job and say that business is unpredictable and you may need to rely on their income for an undetermined period of time. It is better to be surprised by a "good" month than by a "bad" month.
You should also discuss how you will deal with the business as a couple. Establishing early on who will do what (if you work together) will save you the heartache of arguing about the businesses ups and downs. If you have young children, expect them to become jealous if you spend more time working than you do with them. Allowing them to help in small ways can add up to big rewards.
If you become territorial about your business instead of involving family, you are guaranteed at least some friction. Even when family members (and friends) offer bad ideas, praise them and validate them for caring. See their input as a desire to help you succeed and not as a critique of you. Putting aside your pride and Having thick skin will help you make better business decisions and keep your interpersonal relationships healthy and strong.
A Rainy Day Will Come
Other first-year start-up costs include insurance, taxes, and unexpected expenses. For example, most businesses need some form of technology to operate smoothly. If your computer dies or needs to be upgraded, you could be dead in the water if you do not have funds to draw on the handle emergencies.
Although savvy new business owners will factor in some rainy day costs for the businesses, they may forget the need to factor in personal rainy day events. If you have taken the plunge and are relying on your business for income, what happens if your business cannot pay you and you incur unexpected medical expenses, your car or home needs a major repair, or you need to upgrade your business wardrobe to impress clients?
Don't Get Too Excited About Profits
Money is coming into your business and you are (and should be) doing cartwheels. But do not forget that you will need to pay quarterly taxes to the federal government and your state on any profits made. Unless you are not going to owe any taxes for the year, you need to budget to pay taxes.
Depending upon your business structure, this could mean payroll taxes as well as income taxes. Many localities also base business license fees on how much money you make. Have a profitable year and your business license could cost you more next year.
The most important start-up cost to consider is your own salary. Many business owners are willing (and expect) to work for free, or at a reduced salary while they establish their businesses. However, you will still have personal expenses and bills to pay outside of your business expenses. If you do not have personal funds set aside to cover months where the business is not bringing in enough income to pay yourself, you will quickly find yourself in a difficult place.
Have a Backup Parachute In Place
If you form a sole proprietorship you and the business are essential one legal entity. If someone sues the business, they can collect from you personally. If the business has debts - they are your debts. If you start a corporation, you limit your financial liability, however, you could also be booted out of your own business if your board of directors rallies to fire you.
To protect your long-term personal and business future, be sure to research the various types of business structures to choose the one that makes the most sense for you. Just because your friend chose one type of business structure, does not mean it is right for you.
Ask yourself in advance- what happens if the business fails and you have already quit your job? The unexpected will not catch you off guard if you plan ahead. Losing a business is hard enough to deal with- losing your home because of a failed business is far worse.