Business Formation – Personally Funding your Startup

Last week we discussed the mindset for starting a business, and this week I would like to touch on an important step toward starting your business – personally funding your startup. More specifically, I mean preparing financially to transition from employee to self-employed including remaining an employee while you build your business, saving, cutting expenses, and reinvesting capital in your business.

Balancing a Job and a Business: The first strategy I would like to propose to you is to continue where you are, with what you are doing as an employee and to start the business up as you go. The idea here is simple, but the outworking can be challenging in that it may be a lot of work – but it is worth the effort to be successful. In the early days of setting up your business, you will probably be working on business documents and plans, web site, social networking, getting your brand together, and maybe doing some odd jobs here and there for your business. In essence you will be doing what the IRS would see as a “hobby,” and will not have enough momentum to take it beyond this. The big idea here is to not upset the apple cart and add too much pressure on making the business profitable in the early days. This is simply not possible for a lot of startups, and running out of cash will end your dreams and business all too fast. Once you have the business up to a going concern (something that is bringing in supplemental income and is covering your expenses), then consider cutting back hours at work and ramping up the business as you do. But does this always work? I will say that I attempted to work this strategy recently and it did not go through because my employer had me sign a non-compete agreement that kept me from working elsewhere in the accounting field, including my own business. There were other factors involved, but this ultimately led to me leaving the company. However, I do have other sources of income and consider myself in the part-time realm. I may look for additional part-time work to hold me over until my business is stronger.

Saving: So before you started your business and while you are still an employee you need to be saving saving saving… The goal is to build up as much of a reserve as is needed to make it through your projected ramp-up period to where your business is bringing you your full income – twice over. I say twice over because the best laid plans always go wrong, especially in starting a business. If you plan for twice as long as you need, you will be about right for your personal expenses. Now another thing you need to save for is business startup expenses. Depending on the industry, this may require a loan or significant amounts of money; however, my advice is to avoid going into debt for anything at any time. I will go into this further, but suffice it to say that debt will take you further than you wanted to go, keep you longer than you wanted to stay, and cost you more than you wanted to pay. Considering that 9 out of 10 businesses fail in their first year, going into debt to build a business with a significant chance of failing before you can pay that money back is not a good idea.

Cutting Expenses: With what I said above, the best way to go about starting a business is a lot of elbow grease and as little money as you can get by on at first. This means that instead of going out and renting an office, use a desk at home. Instead of going out and buying a new computer or iPad, using the beat up laptop you already have. Instead of buying new tools, running your old ones into the ground. I would challenge you to use as much of what you already have to get this thing off the ground with as little overhead to you as possible. Not only in your business, but also in your personal life. Cut out the cable, drop a phone (or transfer your # to a google voice # and use VoIP technology on your iPhone… if you want to know more, post a comment and I will detail this, but it is saving us $90/mo right now), sell your car with the car payment and pick up a beater, stop going out to eat, etc… you get the point. You may think this is a bit over the top, but consider it as a season an an investment into your future.

Reinvesting Capital: So you have saved all of this money, cut your expenses down to bare bones… what do you do now? Now you reinvest. How do you reinvest? You don’t take money from your business. This is why you are still working, saving, and cutting your expenses… so you don’t have to take money away from your business. Take this money first to a savings account and build a buffer for your business so that you can handle the rocky start that you are going through. I don’t have any amounts to give you because each situation is different and has different requirements. After that, you take any money that you make for your business and you reinvest it to pay your (minimal) business expenses at this point so you don’t have to cover it out of pocket. You also want to start to pay down any debt you incurred in the startup instead of continuing to deeper into debt. Then make a list of the most critical items you need for your business – from items you absolutely can’t do business without to the ones that would be nice to have. Then take your debt and your personal situation and line them up. Start knocking out the low hanging fruit (the easiest, cheapest solutions that have the largest positive impact on your business). Example: in order to run payrolls for clients in my business at Crossroads Accounting, I need to purchase a new computer, printer, advertising, different software, and a payroll program through QuickBooks for $400/yr. I didn’t purchase any of these items out of the gate except a cheap printer because I had to print, but instead I waited on the rest until I got my first payroll client. Then I offered them a deep discount to pay for services up front along with a setup fee, and I used that money to purchase the low hanging fruit of the payroll subscription that brought me the greatest benefit at the least cost to the business. In this way I kept my money in the business to build it until it could support itself.

In building into the business from the start and not taking money out, you are giving your business a chance to grow. You must treat your business like a child and pour into them over and over again so that they can grow. You can’t expect a baby to walk or a 5 year old to do Algebra, and you can’t take from your business until it is old enough to support it. If you do, you will end up cutting the legs out from underneath you. Just like a parasite that overwhelms its host, you end up taking the lifeblood of cash out of your business that it needs to survive.

I hope this helps spur some ideas in your mind about how you can plan your road toward a successful business. Let me know what you think!

Keep Reaching!


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