Some want to change the world, some want to bring in a little money on the side, and some want the flexibility of being their own boss.
There are many different reasons people decide to start a business, but before taking the plunge, there is one major question that can lead to a lot of sleepless nights – am I financially ready?
The thought of giving up a steady paycheck can be daunting, especially if you already have expenses that you are committed to or have dependents to take care of. And in the world of startups and small business’, cashflow will be crucial to your success.
Cashflow allows you to operate your business, grow it and provide the lifestyle you desire. Without it, debt will increase, business development will slow, and your business / lifestyle is put in jeopardy.
But if most businesses aren’t profitable in the 1st year, then how can you survive?
It all comes down to having a cashflow plan in place for the launch of your business. Whether you are planning on creating the next Facebook, or turning your hobby into a side-gig, being prepared and having the proper cash runway can be a make or break for your business.
I’m going to outline 5 steps you need to take in order to have peace of mind when launching your new business (from a financial standpoint), so that you can put your entire focus into growth.
I’m assuming that you already have a business idea and have taken the initial steps towards validating your idea before investing time/money.
#1) PROJECTING EXPENSES (PERSONAL AND BUSINESS)
The first and most important step is to project your expenses, both business and personal, for at least the next 12 months.
With the excitement of pursuing a new idea, the last thing you will want to do is create a “budget”, however this will allow you to determine your cash runway amount.
You will want to ensure you can cover all of your necessary expenses, while having an emergency fund ready for anything that comes up.
Be ready to sacrifice. In the early stages, you may be taking a step backward in your annual salary. This means there are areas you will have to reduce or cut out (savings, travel, luxury, etc.).
The best way to start is to find the drains on your monthly cash flow. These could be memberships you don’t use or general spending you don’t necessarily value.
Once you’ve figured out the total $$ you will need for the first 12 months (both business and personal), it’s time to build your cash runway.
#2) BUILDING YOUR CASH RUNWAY
Your cash runway is a pool of savings put away to fund you through the first year of your launch. This should be held in a savings account (shop around for the best rates using www.ratehub.ca) and available for personal or business expenses.
In a perfect world you would have enough to cover at least 12 months, although this can be unrealistic.
A great way to help fund your runway is to have a side-job, or even a full-time job while you launch your business on the side.
This will take an extreme amount of pressure off your cash runway and you, knowing you have a steady paycheque coming in to cover key expenses.
Having a side-job is actually the way I was able to start my own business.
Another way could be to take on low-interest debt, such as a Line of Credit. Be aware, this can be a risky strategy and should be reviewed thoroughly before taking this route.
#3) TRACKING YOUR TRANSACTIONS (ACCOUNTING & BOOKKEEPING)
You thought organizing your annual taxes were annoying with just a T4 slip from your employer? It’s a whole new annoyance for entrepreneurs as they have to track every single expense and all sources of income.
If you truly hate spreadsheets and numbers, using a bookkeeper that specializes in small businesses might be worth the cost, however in the initial stages, a simple spreadsheet will suffice.
You will want to check your federal and provincial/state tax websites to find out which business expenses are deductible. For Canadians, you can find the CRA Approved expenses here.
Another option is to use software to track your expenses. These will provide a much cleaner interface, better organization, and better outputs for year-end tax filing / business analysis.
#4) FILING YOUR TAXES – ACCOUNTANT OR DO-IT-YOURSELF
Now that you’ve been diligent in tracking your expenses to ensure you don’t pay a dollar more of tax than you have to, it’s time to file.
This is an area that I would recommend using a professional tax accountant, as their cost is quickly erased from tax savings and planning strategies that do-it-yourselfers fail to catch.
If you have a background in tax, or have an extremely simple operation, you could probably do it yourself. There are a lot of free or low-cost online tax filing services that you could use.
The last item you will want to look into is insurance or licensing. Some industries are heavily regulated and require you to be registered through a professional organization. They may also require you to have liability insurance in place (such as the financial services industry).
This is an area that may not be 100% critical on day 1, but it is something you at least want to think about and ensure you have coverage before you need it.
The last thing you would want is exposing your personal savings and assets to liability because you decided to follow your dreams and start a business.
Do some research online and talk to an expert in your industry to find out more.
While there are many considerations to take in when launching a business, following the five listed above will provide a great foundation to reduce financial stress in the early stages, which you will thank yourself for later during the tough times of entrepreneurship.
Some other key areas you want to be aware of from a financial, tax, or legal standpoint is:
- Structure of your business: There are different options for choosing the structure of your business, all with different tax, liability, and cost attributes. Most businesses will start as a sole proprietorship or partnership, but as you grow, incorporating might make the most sense. You will find a lot of information online depending on the jurisdiction you are in, but again this is an area that should be reviewed with an expert as your business and revenues expand.
- Registering your business name: You will also want to make sure that your business and business name are properly registered with your province, state or federal governing bodies. Registration is quite straight forward and easy, however you will want to make sure you do it correctly the first time.
Are you ready to start a business but not sure how to register your business name? If you are going to operate using your exact legal name (e.g. Brandon Hill), you are okay. But if you want to sell services or products through a brand, you’ll have to register your business name. Click below to get a free cheat sheet on how to register your business name in Canada.