There are a few fundamentals that every business must have in order to operate as a business. First and foremost is the fact that your primary objective is turning a profit. Even the IRS takes the position that if all you do is continuously generate losses they will consider your “business” a hobby and disallow your losses. There not only needs to be a profit motive but a profit generated. This may seem like a no-brainer to you but in my 30+ years of experience I have seen far too many startup generate nothing but expenses and there are some good reasons for that which I will cover next.
Before quitting your day job to open your 1st business I suggest checking off on a few items of importance. The first item on your list is to have a product or service that people will actually pay for. Not something you think they will pay for because in the end it doesn’t matter what you think, it’s what “they” think. That’s the plain, simple truth. If you’re not sure about it then before you spend tons of cash and bankrupt yourself do some testing. Use your circle of friends and family and then their circle of friends and family. It’s important to be able to get people that don’t already know, like and trust you to buy. If you can show that without a shadow of a doubt that you have something that will generate revenue continue reading. If not the rest of this article is of no use to you.
Once you determine that you have a product or service that will generate revenue these are the next steps you need to take and why:
1: Prepare a monthly personal expense budget.
You need to determine how much you need to generate in distributions from your business to at least meet your monthly outlay. Unless you are already out of work with no other income options you need to keep paying your bills. Don’t just quit your job unless you have at least a year’s worth of savings to carry you through.
The reason for this is that without a cushion you will feel the stress of having to make money. Stress clouds our judgement and drains our energy. You always need to be in tip-top shape mentally and physically. You’re going to have enough distractions and obstacles to begin with and don’t need to add any self imposed burdens on yourself. Additionally, knowing what you need is 1,000 times better that operating in the dark. Knowing your numbers is essential if you want to run a successful enterprise.
On the next page is a simple worksheet to help you determine your monthly nut. Don’t make the mistake of omitting things like meals and entertainment, vacations, holidays, birthdays and the all important surprises that are sure to occur like car and home repairs. If you have children leave a nice big fudge factor. This is just your expenses, not revenue and not even broken out on a monthly basis. It’s just an estimate so don’t go into needless details. Keep it simple!
PERSONAL MONTHLY EXPENSE SCHEDULE
CREDIT CARD PAYMENTS
After checking off the personal expense budget one of two things will happen.
- Reality will set in and you will realize that starting a business is a big risk not worth taking or to proceed with caution.
- You want to go on to the second item on the list.
2: Prepare a schedule of startup cost.
These are all the expenses and capital investments associated with getting the business off the ground before you start generating revenue. This is another potential blow to your plans on starting a business. Reason being is that entrepreneurs are full of enthusiasm and optimism which is needed but also one of the characteristics that get us into trouble. Getting the numbers down on paper and reviewing them accomplish a few objectives. It brings us down to earth revealing exactly what’s at stake financially. It’s also the first step in learning how to know your numbers. You will learn that part of running a successful business is knowing your numbers.