Finance

How to Become Financially Ready to Start Your Business

How to Become Financially Ready to Start Your Business

Have you ever had a really great business brainstorming session that abruptly ended when you started to get worried you weren’t ready? You may have said things like, “This feels really risky. What if I don’t get any clients? How will I support myself?”

Every woman has those concerns at some point during the initial phases of planning a business. But you can take four steps to help mitigate some of the risks and put yourself on a good financial footing:

  • Market-prove your idea
  • Get an emergency cushion
  • Develop your goals
  • Track your expenses

Working on these steps will help you build confidence so you can move closer to doing what you’re passionate about. Here are some more details on how to get there.

Market-Prove Your Idea

Steve Blank helped launch the Lean Startup Movement and pioneered the idea of failing fast so that you don’t invest your hard-earned dollars on a product or service that is doomed to go belly-up within a few years. Customer development should be the focus of any startup’s business model, according to Blank. Here are a series of questions that you must answer before moving forward, taken from Steve Blank’s online lean startup course:

  • Who are your target clients?
  • What need, demand, or problem are you solving for your customers? Where do they have pains or what do they stand to gain by buying your product?
  • What do they like and where do they shop/get information/go?
  • How will you acquire your customers and keep them as paying clients?
  • Have you spoken to lots of potential clients to fully understand their needs? If so, are they ready to buy your product or service? If not what can you do differently to meet their needs?
  • How is the product or service you’re offering different from your competitors’ product?

Answering these questions and market-proving your idea will give you a foundation for writing a stellar business plan.

The bottom line here is: provide value to the customer. Don’t get bogged down in operations such as where you will host your website, where you will bank or what CRM software you will use until you’ve completed this comprehensive foundation for customer development.

If you don’t have a product that customers are ready to buy, you’re not financially ready to start your business.

Get an Emergency Cushion

If you’re going to be an entrepreneur, you have to build up an emergency fund to provide a cushion for unplanned expenses during the startup phase. What if you get sick or injured and can’t work? Unexpected life changes can pop up at any time. An emergency fund will help make sure that doesn’t turn out to be catastrophic for your business. Since your revenues will be unpredictable for a while, experts say entrepreneurs need at least nine months of personal expenses in a highly liquid account to serve as an emergency cushion. Preferably, choose an online savings account that earns more than a basic bank savings rate.

To estimate exactly how much you’ll need for a cushion, you’ll need to have a good handle on your monthly personal expenses and stick to a written budget.

If you aren’t able to build up a healthy emergency fund before you start your business, it’s a good idea to make sure you have other sources of revenue. Focus on your entrepreneurial endeavor while you still have a full-time job. Or, if you’ve already made the leap, supplement your income through side jobs. Here’s an interesting list of things you can do to earn extra money while starting your business, from Entrepreneur.com.

I have several entrepreneur friends that drive for Lyft on weekends and focus on their business during the week. Another option like temping or offering your skills at on an online outsourcing platform allows you work towards your entrepreneurship goals while using the skills you already have. You may even be able to use your side gig as a way to test out business ideas with real customers!

Don’t invest all your money in the business, make sure you have enough to take care of yourself if there are unplanned personal expenses.

Develop Your Goals

Once you do the work up front talking to potential customers to develop the right product(s) to meet their needs, and building an emergency fund, then you can evaluate the financial needs of the business. Make a list of the kinds of items that will be fixed costs for your business and what will be variable depending on volume. It’s important to take a minute to evaluate which of these are “needs” to get your business off the ground versus “wants” that could be held off until you’re making revenue. Office space for instance, isn’t a necessity for a lot of startups and you can save a ton of money by working out of your home or in public spaces such libraries or coffee shops.

Once you evaluate potential fixed and variable costs, look at how these expenses will come due. We all pay for our lives on a monthly basis, so convert all expenses even quarterly or annual expenses to a monthly budget.

Then review these important questions: How many clients will you have to get each month to break even? How many clients can you reasonably onboard on a monthly basis? How many clients will you need to make enough to support your business and personal expenses? How many clients do you want to have by the end of the year?

Then project some goals for yourself for years one, two, and three so you can evaluate your progress over time. Once you complete the customer development exercise in step one, and the cost and revenue brainstorming in step three you have nearly enough information to finish your business plan.

The last piece of the business plan is funding. Hopefully, you’ll have enough initial clients to offset recurring expenses. If you don’t, you’ll need to find a funding source for startup costs and ongoing expenses. The first line of funding will likely be your own personal resources, business credit cards or friends and family. Banks simply don’t provide loans for brand new businesses without at least two years of revenue history.

Work on a plan to first get the right number of customers to meet your monthly expenses, then project forward to look at potential revenue growth over time.

Track Your Finances

There’s one last tip. No matter what, track your expenses carefully and keep your business and personal expenses separate. This will make your life easier come tax time, and it will make you more desirable to financial lenders when you apply for loans or other funding sources. This is easily done by setting up separate business and personal accounts. Setting up these systems early will help you determine financially whether you need to pivot or adjust your efforts, or provide good proof that what you’re doing is working.

When you track your expenses and revenues carefully it’ll be a cinch to review profitability and return on marketing investments.

Starting a business may take a lot of time and require a lot of hard work, but it doesn’t have to be a huge financial risk if you do some upfront planning.

What actions do you intend to take to feel financially confident in your business? Have you encountered any other financial issues?

About the author

Cady North

Cady North is an entrepreneur and personal finance expert. After more than a decade in financial services and public policy, she started North Financial Advisors out of a desire to bring independent and affordable financial advice to women entrepreneurs. Her company specializes in preparing comprehensive financial plans for women and entrepreneurs in all phases of their lives. By sharing her extensive experience in financial analysis, management and marketing methods, Cady helps individuals make smarter business and financial decisions as they start new ventures. She enjoys helping her clients dream big, find financial freedom, and navigate life changes.

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