Can you afford to start a small business?
If you are considering starting a small business it is very crucial that you need a clear idea of how much money you will need to get started and how much you will be able to make.
You need to know earlier rather than later if you can really afford to start your business. This process will help you determine how much money you are going to need. Once you have a figure in mind then you can work out how much you do not yet have, and how long it will take you to gather the funds required. It will also help prevent you from starting too early and being undercapitalized which is one of the main reasons people fail in their first few years.
It is important to understand that starting a small business takes a huge commitment mentally, emotionally, and financially. By going over some key points you can then assess how financially ready you are to start a business and it can give you some ideas to discuss with your attorney, accountant, banker, or financial planner. The first section of questions requires specific answers as they pertain to your situation.Since everyone's financial picture is different by answering these questions as they pertain to you, you can then gain a real financial picture of what you need to get started.
- What is your actual net worth (this number is savings, property, and investments minus all debts)?
- How much income do you currently need to make monthly for you and your family in order to maintain your current standard of living?
- How much life insurance do you in order to take care of your family if you die prematurely?
- Are there major expenses that you should plan on in the next 10 to 15 years (for example, buying a house or paying your children's college tuition)? How much will these expenses total?
- How much of your current and available savings and investments can you risk in starting your new business?
- How much total investment will be required to launch your new business?
- How much of the business's financing and other debts will you need to personally guarantee?
- Keeping in mind that lenders will generally require a business owner to contribute at least 25% of the startup costs, how much of your assets are you able to risk being available to cover operating and living expenses?
This next set of questions should be answered by yes or no. Keep in mind that too many negative answers may mean that you are not prepared to start this business and should do some further planning.
- Under your business plan, will the money you can afford to risk for operating and living expenses be able to last you for at least eighteen months? It is important to keep in mind that most businesses which fail will do so in their first year, often for lack of planning or inadequate funding. In addition many businesses will not be profitable for at least two years.
- Will you need to devote yourself full-time to your new business, or will you be able to earn a part-time income elsewhere?
- Has an experienced mentor or business consultant given your business plan a positive review? Does he or she also believe your financial goals are reasonable?
- Assuming that your business is reasonably successful, will your income after several years at least be equal to what you could make working for someone else and provide enough additional money to replenish the funds you put into the business?In addition will your future income rise at least as fast as it would if you worked for someone else and received salary raises and promotions?
- Will you have adequate property, liability, and (if applicable) directors' and officers' insurance?
- Will you be able to minimize a majority of long-term business debts?
- If your business does not succeed, will your employment prospects be at least as good as they are now and will you be able to recoup any of your investment by selling its assets?