Deciding to start your own business is a daunting decision and not something that should be taken lightly. If you feel you’re at the right time in your life to be taking the plunge, there are few steps you should take to make sure you’re financially ready.
When you know the right financial steps to take first, you can better prepare for the challenges that come with starting a business – setting yourself up for success.
1. Know Yourself
Before starting a business it’s important you understand yourself first. Ask yourself these questions:
- Why do you want to start your own business?
- What goals are you trying to accomplish?
- What does success look like to you? What does failure look like to you?
- How much risk are you willing to take to get your business off the ground?
The answers to these questions will be differ from person to person. This will help you create a business plan that works for you, that you can stick to even when times get tough.
2. Create an Emergency Fund
While everyone should have an emergency fund, it’s even more important for those about to start a business. A study by U.S. bank found that 82% of small business fail due to cash flow problems.
So, by creating an emergency fund of at least six months of expenses you’ll create a safety net for your new business if things get rocky in the initial stages.
Depending on your situation you might want to consider a larger emergency fund. For example, if you are the main source of income for your household the effect of your business failing could be more substantial, so consider an emergency fund that’ll cover 12 months of expenses.
3. Pay Off Any Debts
While you can still start a business with outstanding debts, it would be a better financial decision to reduce your debts before you start your independent business journey.
This is especially important if you’re taking out a business loan as less debt will make you more attractive to lenders. This way you better your chances of being approved for the loan and you’ll be able to get a lower interest rate.
Even if you plan to finance your business entirely yourself, paying off your debts before you start is a good idea. This way you’ll have less financial obligations if things get tough with your business, and it’ll be easier to get through.
4. Know the Law
Before launching your business, it’s important to know the legal processes that you’ll be required to follow. For businesses in the UK, you must register and insure your business before you do anything else.
To legally register your company, you’ll need to choose which type of business is right for you:
- Sole trader – It’s easier to register as a sole trader, but with this type of business you’ll be responsible for any business debts.
- Partnership – A partnership is the simplest way for multiple people to set up a business together. You’ll also share responsibility for any business debt.
- Limited company – For limited companies your finances will be separate from your personal finances, but there are greater reporting responsibilities.
Once you’ve registered your company, the next step is to insure it. There are different types of business insurance, so you’ll need to choose the one that best fits your company.
5. Set Up Your Business Finances
A key step to setting up a business is separating your business finances from your personal finances. Open a checking account that you solely use for your business, to receive payments and pay for any business expenses.
This way you’ll have a separate record of your business transactions and you’ll be able to see more clearly how your business is doing.
Read Now: How To Save Money With Your Own Business
6. Have a Contingency Plan
Even if you take all the possible steps to increase the chances of your success, it’s wise to have a contingency plan just in case things go south. Starting a business has its risks and success isn’t always guaranteed.
Ask yourself: if things go wrong, when will you be willing to accept its not working and cut your losses? This will help you to get out when you need to and avoid persevering – which could lead to suffering even greater losses.
7. Consider Working with a Financial Advisor
Financial advisors can take into account your specific financial situation and help you create a financial plan to reach your goals. When starting a business, especially if it’s your first time, a financial advisor can help guide you through all of the necessary processes and make the experience less daunting.
For further advice on how to set up your own business, contact our expert advisors at Count today.