Starting A Small Business: Making The Leap
By Amy Fontinelle
Often, the best way to strike out on your own is to do it gradually. This reduces the risk that you'll be without an income and allows you to test the waters and see how much potential your business idea has before you give up your regular paycheck. If you're currently employed full time, it may seem impossible to muster up the time or energy to work on a business plan. Hopefully, the excitement you feel for becoming independent will motivate you to use your nights and weekends to get your business up and running.
If you can find the time to do the work and it doesn't create a conflict of interest with your existing employment, it's smart to start acquiring clients and customers and providing your product(s) or service(s) to them while you still have your day job. You'll start creating a revenue stream for your business and get an idea of whether your business has the potential to sustain you if it becomes your only source of income. But before you do anything else, you should create a business plan.
Developing a Business Plan
Every business should have a business plan, but it doesn't necessarily have to adhere to a specific template. The complexity of the business you're starting, the type of business you're starting and your funding needs will determine what kind of business plan you need. (Find out how to put this important document together in 4 Steps To Creating A Stellar Business Plan.)
For a simple business that you will be funding yourself, the purpose of a business plan is not so much to create a formal document as it is to think through the details of how you will make your business a success. You will be much more likely to succeed if you consider every aspect of your business before you jump in. To get started, ask yourself these questions:
- What will my business name be?
- What product(s) or service(s) will I provide?
- What makes me qualified to run this business?
- Do I need any additional education, training or credentials to be successful?
- Is there a demand for my product(s) or service(s)?
- How have I determined that this demand exists?
- Who are my primary and secondary target customers/clients?
- How will I get them to purchase my product or service?
- If I am providing a product, who will my suppliers be?
- What will my business hours be?
- Where will my business be located?
- Will I have any employees?
- What will my business expenses be?
- How much money does my business need to make annually for me to stay in business?
- What price will I need to charge for my product(s) or service(s) to meet my financial goals?
- What assets do I already have for my business? What assets do I need to acquire? How much will they cost?
- What other startup costs will my business incur?
- How long might it take my business to break even? To turn a profit? Can I afford to wait that long?
- How many hours a week will I need to work for my business to be successful?
- How many hours a week can I realistically work given my energy level, focus, family commitments and other obligations?
- How will I balance running a business with my other obligations and activities?
- Who is my competition, and how will I differentiate myself from them to gain market share?
- How will I market my business?
- What alternate product(s) or service(s) could I branch out to if my initial ones aren't successful?
- How will I maintain my business through tough times?
- How much time or money can I afford to devote to my business in lean times before I have to go back to having a regular job?
A. Loan applications
B. Capital equipment and supply list
C. Balance sheet
D. Breakeven analysis
E. Pro-forma income projections (profit & loss statements)
F. Three-year summary
G. Detail by month, first year
H. Detail by quarters, second and third years
I. Assumptions upon which projections were based
J. Pro-forma cash flow
A. Tax returns of principals for last three years
B. Personal financial statement (all banks have these forms)
C. For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchiser
D. Copy of proposed lease or purchase agreement for building space
E. Copy of licenses and other legal documents
F. Copy of resumes of all principals
G. Copies of letters of intent from suppliers, etc.
There are many excellent sources of business plan information online and at the bookstore. There are also many business plan software programs that provide templates for all kinds of businesses. There is bound to be a template out there for a business similar to the one you plan to start. You can use this template as a guide to create your own business plan instead of starting from scratch. This way, you'll be less likely to omit key information and you'll have a professional format to work with.
Developing a Budget and a Plan for Lean Times
Another key element of planning your business and transitioning from being an employee to a small business owner is budgeting. Just as you would create a budget to manage your personal finances, you must create a budget to manage your business finances. If you haven't been keeping a budget for your personal finances, it's time to start. The success of your business will depend on your ability to manage money, and your personal financial situation will be directly linked to your business's financial situation. (Refer to our Budgeting Basics Tutorial for more information.)
Tracking Inflows and Outflows
Your business budget will show you exactly how much money you have coming in and going out. It will show you where your income is coming from and what you're spending that income on. It will help you make both short and long-term projections about your business's income and expenses. It is key for having a clear picture of where you stand financially and where you're likely to end up, and it can help you see potential problems before they arise as well as help set goals and time lines for those goals.
A budget can also help you plan for changes in your business and help you manage your money well enough that you can afford to give yourself some time off once in a while. Budgeting will help you plan for making tax payments (more about those in section 8). And, while everyone should have a budget, managing your money is extra important if your business has investors or creditors to pay.
You can create your budget with a notebook and pen, spreadsheet software, financial software or an online program. You'll need to keep track of every expense, whether it's $2 for a package of ballpoint pens or $300 for a laser printer, as well as every dollar you take in.
Building a War Chest
Just as you have an emergency fund for your personal finances, you'll need to create an emergency fund for your business. Budgeting will help you do that by letting you see how much you can afford to set aside in savings each month. The bigger your business's emergency fund, the more stable your business will be.
If you're used to earning a steady paycheck and having taxes withheld from your paycheck, the fluctuations in income and expenses you'll experience as a small business owner may be shocking. Eight months of the year, you'll pay no taxes, and four months of the year, you'll make large payments. Your income might be $1,000 one month and $10,000 the next month. It all depends on how many sales or assignments you have and when your customers or clients actually pay you. In the month when you bring in $1,000, you'll need to rely on your savings. In the month when you bring in $10,000, you'll need to set aside a lot of that money to handle the next shortfall.
Your budget will help you see how your income and expenses are averaging out over time and what kind of profit or loss your business is seeing from month to month and overall. (To learn more about weathering unexpected events, check out Keeping A Small Business Afloat.)
You've determined how you will run your business and manage your business's finances. But there are still more steps to take before you're up and running. In the next section, we'll explain how to find a business location and how to obtain the necessary permits and licenses.
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