Thinking about going into business for yourself? The good news is that you don’t have risk your house or go into debt to do it. But you do need to consider how you’ll supplement your income as you build your new venture. Rumor has it that only one in 10 new businesses succeed, and most of them gobble up cash for years before they show a profit, which is usually not for about five years (maybe sooner, if you’re really lucky). By planning for alternate sources of income, you can protect yourself from crippling financial damage. And that’s a good thing.
Here’s are a few things you should consider doing before stepping into the brave new world of entrepreneurship:
- Figure out what you need to make on a monthly basis. According to Terry Starr, co-founder of MyWorkButterfly, a social network that advises, supports and offers solutions to mothers returning to the workforce, this step is critical in figuring out how you are going to survive while you launch your business. “Even though we launched our company in January 2009, we recently went through the exercise of figuring out how much money on average we were spending monthly, and were shocked at the numbers,” she says. Fortunately, she and her partner could afford it, but not everyone is in that situation. Her suggestion: If you realize that you won’t be able to afford the investment in your new company, you can either take out a loan, or take on a business partner to defray some of the costs. So before you do anything else, do the math. Factor in your business start-up costs, and maybe a latte or two. This is your number. Own it. Or share it, if you have to.
- Ensure that you have a steady source of income. That might mean taking on a part-time job or some steady freelance gigs. If you freelance, assume you’ll only be able to bill clients for up to 20 hours of work per week; it’s harder than you think to bill for more than 20 hours as a freelancer. When Nathan Shackles decided to found his own business two years ago, he first started by taking on 10-20 hours per week of extra work, in addition to his day job. “I saved every dime of the money I made from the contract work to provide capital for my business,” he says. One month ago, he launched his new product, ApplicantStack, a Web-based applicant tracking and recruitment software for human resources and staffing agencies. While Nathan was able to work full days and extra hours on top of that, that kind of schedule isn’t for everyone. You may want to approach your current employer about reducing your hours or transitioning into a contract position. Given the uncertain economy, your boss may be open to ideas that may save the company some money while giving you the time and flexibility to set up your own business.
- Set up a savings account. If you’re leaving a full-time job, do it six months before you announce your departure. Then commit to making regular deposits. Laura Rangel and Lisa Steen Proctor, co-founders of Karito Kids, a multicultural doll company that teaches kids about giving back, started their company with $10,000 each from their savings accounts. Both agree that putting money aside now to help fund your future business is the best way forward. So save as much as you can. Six months’ worth of savings may be a pipe dream for many of us, but it’s a worthy goal. Check out Smarty Pig, where you can open an account, establish some savings goals, and monitor your progress.
- Identify your most bankable skill. That means the skill you have that can make you the most money easily. Making money while you’re launching a business doesn’t have to be glamorous or fulfilling. It has to be lucrative. Lisa and Laura of Karito Kids found that their skills saved a ton of money on professional services – Lisa is an attorney, and Laura is a marketer. Both of those backgrounds and skills were critical in helping to do things like create a brand and negotiate vendor contracts. Use your skill to your advantage.
- Find a mentor with experience in your space. Everyone can use advice from someone who has been there and done that – and been successful at it. A mentor can point you to networking opportunities, troubleshoot financial pitfalls and provide you with support when you most need it.
- Line up part-time work in advance. Ideally, weeks or months in advance. Sometimes, you can’t; opportunity doesn’t always knock when you’re ready for it. But if you have the luxury of lead time, figure out where your steady income will come from before you dive into the new business.
- Don’t burn bridges! If you leave your job on good terms, your former employer might be open to hiring you on a part-time contract or hourly basis. But remember to have the part-time work conversation with your employer before you leave.
Nobody should start a business with the unrealistic notion that they’re going to make tons of money right out of the gate. That’s just not going to happen. Building a successful new business takes time, money and a lot of sweat and effort. By the same token, embracing entrepreneurship doesn’t mean that you have bleed red ink all over the place. It’s okay to pursue your dream. Just be sure to plan ahead for it.