So, you’re thinking of striking out on your own? Congratulations. You’ve just made a life-changing decision that is not for the faint of heart. And, you are about to start on a unique journey where you get to create your own future. Exciting times.
Before you go rushing out the door, though, let’s go through a quick financial checklist to ensure that you are ready. As I’ve mentioned in an earlier post, most of the reasons for a startup failure are related to money – whether that involves not having enough of it or running out of it too soon due to various challenges.
When you’re first starting out solo and bootstrapping, there is practically no separation between your personal finances and your venture finances. These 5 pre-startup steps will help you ensure financial security as you go through your difficult initial phase. We’ll get into each one in more detail over the coming week.
1) Getting your personal finances in order:
Whether you hire a professional financial advisor for this or do it yourself, make sure that you have:
a) an accurate and real-time evaluation of your total net worth
b) a realistic plan to reduce your personal liabilities and negative cash flow as appropriate
c) a detailed, trackable and goal-oriented monthly budget
d) an emergency fund that is liquid enough and large enough to see you through the first couple of years of your new venture
I recommend a) through c) to everyone – regardless of their work situation or stage of life. But, to someone starting a new venture, they are even more critical as a foundational element of their financial security. It continues to amaze me how many people do not have an efficient, standardized system for these basic steps of personal financial management. So, I will cover this in a lot more detail in the coming days.
2) Developing a realistic and detailed financial plan for your new venture:
Most entrepreneurs / freelancers / independent professionals / smallbiz owners will tell you that they spent more than they’d intended during their early years. Having a thoroughly-detailed and realistic financial plan will not help avoid this entirely, but it will definitely give you a solid check and balance and quantified milestones to measure your progress. There are several steps involved with creating this plan and I will dedicate at least 2-3 separate posts to it.
3) Managing financial liability / risk appropriately:
We want to protect your net worth from any roadbumps in your new venture. The level of potential financial liability / risk will vary depending on the sector and your individual circumstances. In addition to various necessary personal and business insurance policies, there are other aspects to consider here – like how your existing financial and real assets are allocated and located. This is an area that a lot of people overlook as they think that they do not have substantial assets to worry about. I recommend a professional check-up for this area to avoid any mis-steps. That said, I promise to provide some do’s and don’ts in a future post.
4) Understanding your new tax situation:
The US has one of the most complex tax codes in the world. At the time of writing, Congress is still deadlocked on both the fiscal cliff as well as overall tax reform. Regardless of what they decide, as a free agent, it is important to understand your tax liabilities and incentives (deductions, credits, etc.) BEFORE you start. This will allow you to factor appropriate tax estimation into your detailed financial plan as well as ensure you’re taking advantage of all the credits and deductions that apply to your circumstances. I know a couple of freelancers who missed doing any of this and were presented with a hefty bill from the IRS at the end of the year – which wiped out their entire profits and more. Not fun.
5) Creating a Plan B and Plan Z:
In their book, The Startup of You, Hoffman and Casnocha describe a Plan ABZ approach that I subscribe to. Plan B is not just something you pivot to if your Plan A is not working. Plan B might be an greater potential opportunity that you uncover while working your Plan A. And, Plan Z is what people traditionally have thought of as Plan B – it is about what you need to do if the worst-case scenario happens. As such, Plan Z needs to be realistic, detailed and executable when the need arises.
So, these are my 5 basic pre-startup personal finance to-dos. You may be doing some of this already. For example, I was already doing step 1 pretty well before I started my transition from a corporate career to entrepreneurship. However, I still went through a detailed checkup to ensure that I had not missed anything and found, to my surprise, several areas where I could tighten up further.
What do you think? Did you have a pre-startup checklist? What would you add / change from this checklist based on your experiences? Please share your thoughts in the comments section below and I will definitely respond.
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