There was a post on Escaping from Cubicle Nation a couple of Fridays ago entitled, Is starting a business impossible when you are the sole income earner in your family?, that had to do with the finances of starting a business. The post includes a good section on positioning yourself financially prior to the purchase of a business. I have included an excerpt below.
Get your financial house in order. Get a crystal clear picture of where you stand financially so that you know exactly what you are working with. Evaluate things like:
- Monthly budget – How much do you spend each month? Are there any areas of expense that you could trim to give you more working capital?
- Total debt – What is your total outstanding debt? What interest rate are you paying on your credit cards? Is there a way to negotiate a lower rate?
- Long-term financial needs – How much do you need for your kid’s college fund or parent’s medical or housing costs? What kind of retirement plan do you have in place to make sure you have a happy and healthy life after work? Are these costs currently part of your monthly expenses?
- Savings – How much do you currently have in savings? How many months of living expenses do you need to have to feel safe? I know that many people recommend having 12-18 months of living expenses saved before starting a business, but in my experience that is extremely challenging for most people to accomplish. If you can do it, more power to you. But if not, know where your comfort zone is and work diligently to stash money in the bank.
I think that most of this is dead on with the exception of the advice regarding credit cards under Total Debt.
While Pam Slim does encourage you to negotiate a lower rate on your credit cards, I think that she fails to include a key step here. That being to pay off the credit card debt as soon as possible. And, ideally, prior to starting a new business. Negotiating a lower rate will help. And so will discontinuing their use and making it a priority to pay them off quickly.
Another interesting part of the post regards relocation.
Decide if you could move somewhere with a better cost of living. My good friend John has been contemplating entrepreneurship for a long time, but has been somewhat backed into a corner since he and his family live in Silicon Valley, one of the most expensive areas in the entire U.S. It has been important for him to live there during his tenure as an employee since he has worked for high-tech firms. But if he were to get serious about taking the leap, he could sell his house and move somewhere with a housing market that is not on crack. My smart reader Matthew did just that, moving his family from California to Oregon so that he could comfortably start his new business The Life’s Work Group.
What a great example of making a sacrifice (moving) to make a gain (obtain a business)!
How many of us would consider relocation to have our own business, much less do it?