How to Financially Prepare to Start a Business: 5 Tips
In the excitement of becoming self-employed, it's easy to overlook some of the most important areas of your finances. However, if you want to be successful, you need to make sure you are ready for what comes your way--for both your business and personal finances.
How to prepare financially to start a business
As you set up your business, don't overlook the following financial realities:
1. Insurance
One of the biggest mistakes you can make is to overlook the insurance that you will need as a business owner. If you work out of your home, you need to make sure you have a rider for the business use of your home. You might need other types of insurance as well, depending on your business. Research the types of insurance you need so that your assets and your self-employed income are protected.
2. Benefits
Many of us dream of being self-employed. One advantage of working for "the man," however, is the benefits package. In addition to health insurance, you might have access to a retirement account matching contribution, and special perks like childcare and gym memberships. Some companies even provide cars or smartphones.
Once you leave your job, you will need to create your own benefits package. Carefully consider the cost involved and make it a point to do your best to supply the lack. If you have a life partner, you can coordinate benefits in a way that won't leave you in a lurch.
3. Credit
Establishing business credit can be harder than you think. Many self-employed entrepreneurs don't think of this, but the reality is that personal credit might be necessary when you first apply for business credit. Many lenders will take your personal history into account, especially if your business is relatively new. You will need to take this into consideration because it's normally better if you can manage to keep your business and personal finances separate.
4. Variable income
In the back of your mind is probably the knowledge that you won't have the same cash flow that you used to. However, it still comes as a shock to many when they first try to navigate a variable income. Your variable income can make it a little harder to plan your spending. You need to try to find a baseline, and then set aside money when you make "extra" each month. That way, you will have resources to draw on if you need to.
Setting up a large cash reserve before you quit your day job to strike out on your own is a good idea, too. That will give you something to rely on as you get your business off the ground.
5. Taxes
When I first started my business, I didn't think about taxes, and I ended up with a nasty surprise. Remember that you should pay quarterly taxes, and that you should also keep in mind state taxes. I learned this the hard way. After I got my federal taxes under control, I realized that I had forgotten my state taxes the next year and was still unpleasantly surprised. Don't let that happen to you. Pay attention to what you owe, and make it a point to pay your taxes regularly.
With a little planning, you can make it work as a self-employed person. But if you aren't on top of things, your personal and business finances can weigh you down.
