Starting your own business and leaving the “safety” of a regular monthly paycheque behind is a big step filled with excitement, uncertainty, freedom, and fear.
The early days of any startup can be filled with what feel like endless challenges as you try to develop a minimal viable product or service, build avatars, find customers, and gain visibility through marketing, all while trying to cover your business expenses, pay yourself, and not sacrifice your life.
Here are four steps you can follow to get started with your new business on a solid money foundation:
1. Calculate your personal survival budget
Once you quit your job and start your business, your job income will fall to zero, and your business is going to need to provide. However, growing your startup and generating regular monthly income takes time. To support yourself (and your family if you have one) in the early stages of startup you need to:
– calculate your minimum monthly expenses.
– calculate your total minimum yearly expenses.
– divide your yearly expense total by 12 to turn these yearly expenses into monthly expenses.
– Add all of these expenses together. This is the amount of money you are going to need, each month, to feed yourself, keep the lights on, have at least a bit of fun, and survive without going into debt.
When you complete this calculation, and you have your survival budget, you may surprise yourself on exactly how little you can survive on each month. If you make more than this number during a given month, you can spend more (or save it for later), but knowing what your absolute minimum monthly budget is, and following this budget, will help you give your startup more time to grow and start providing an income.
Ashlea, Fionn, and I have a regular monthly budget of about $7500. Our survival budget is just under $2500. If the business has a bad month or two, we know we can make adjustments and live on less, giving my business the time it needs to become successful.
2. Calculate your business survival budget
It is vital that you keep your personal and business expenses separate. Maintaining this boundary between personal money and business money will make a huge difference in the success of your startup (and your business as it grows).
Calculate your business’s survival budget by:
– mapping out your startup’s monthly survival budget. (Take the time to research and make a best estimate at what these monthly expenses will be if you don’t already know.)
– calculate your startup’s yearly survival expenses.
– divide the yearly expense total by 12 to turn these yearly expenses into monthly expenses.
– add all of these expenses together. This is the amount of money your business is going to need, each month, to operate without going into debt.
3. Calculate your startup’s survival break even point
Now you need to bring these two numbers together to determine your survival break even point by adding them together:
Personal Survival Budget + Business Survival Budget = Survival Break Even Point
This is your business survival break even point. Nothing fancy, no extras, minimal staff (maybe just you). This number tells you how much your startup needs to earn every month to survive without going into debt.
However, your income will not always match your monthly budget. Some months it will be higher (yay!) and other months it will fall short. You can use the final step to help with your monthly cash flow challenges:
4. Save 10% of all your business income to make decisions with and help cash flow.
When running a business, and especially when starting a new business, the list of new expenses can be overwhelming. If you are not careful you will feel like you have lost control and that your expenses and money are running the show. Money comes in, you pay your bills, and the money is gone, leaving you wondering if your business actually accomplished anything.
The other danger of losing control of the money flow in your business is running into cash flow challenges: the money runs out before the end of the month, and in your rush, you have paid the wrong bills, and now you are short the cash you need for something important.
To help with this, take 10% of all your monthly business income (business income * 0.10 = 10% of income) and save it. Then, wait until the end of the month, and take some quiet time to sit down and review what is happening in your business. Then make decisions on how you can effectively use this 10%.
You could use it to:
– pay important bills that you haven’t covered
– invest in the new iteration of your product
– start a new project
– buy needed equipment
– hire a contractor
– save it for a future slow month
– take your family out to dinner, or away for a weekend
The key to this 10% is to make decisions with the money and stick to those decisions (including any consequences of those decisions). Having this end of month cash flow, and being able to make these decisions will help you take control of the money in your business and will change how you look at your month to month operations.
If you still have a job income
If you are still working at your job (full or part time), and haven’t started your business full time yet, there is another step you can take to give your startup a jump start once you finally make the transition:
Start using your personal survival budget right now.
Every time you receive your paycheque, use only the amount of money you need to cover your personal survival budget amount. Put the rest of your money into a savings account and, when you do start your business full time, use this saved income to help cover your personal and business expenses during months when your business income falls short.
This will help keep you and your business out of debt, and extend the time your startup has to figure out what works.
Move from startup to sustainable
Will you be able to hit your break even point every month? I hope so, but the more likely scenario is that some months you will break even, some months you will make more, and some months you will fall short. The experience of a roller coaster income, and trying to make ends meet each month, in both your business and personal life, is filled with uncertainty and stress.
By following these starting money steps you will be minimizing your expenses, saving to help with cash flow, and give your new business a chance to get through the early startup stages and have a chance to grow.