I have been working with new business owners for many years. Although there are many different challenges to starting a business there is one mistake which is made consistently.
Most business owners do not have enough money available when they start the business.
You should have enough cash so you are able to operate your new business for a year without taking any money out of the business for your personal expenses. You have to give your business a chance to take root and grow before you start trying to harvest some profit. While I am drawing a farming analogy here — it is like pulling out the radishes when they are only just sprouting, not waiting for the radish itself to grow and mature.
It takes time to develop enough of a market to be profitable and you have to be able to wait for that to happen. The most powerful marketing is word of mouth and it is not an overnight process. It takes time for people to find out how great your product or service actually is.
Many new businesses are starved of cash flow because of the owners needs for withdrawals from the business. If there is not enough money to buy inventory you won’t have anything to sell. If you can’t afford to offer credit to your customers because you can’t wait for the money, then you will have fewer sales.
If you do not have enough money set aside to survive the first year, then you may have to quit and get a job. This will be sad because it is entirely possible that your business was about to do really well! Many new business owners have to quit too soon because they need a steady paycheque and being self-employed does not always provide that!
Strategies to consider before you make the leap to self-employment:
1. Get a line of credit set up before you quit your day job. Never lie to a bank, but unless they ask you if you are thinking about quitting your job and starting your own business you have not lied to them.
2. Plan for a couple of years before you make the plunge to become self-employed. Save up some money.
3. Start part-time. You can dip your toe in self-employment for a while before you quit your day job. This will allow you to build some relationships with clients before your business needs to be able to support you.
4. Check out government programs that may be available to help you. The provincial governments in Canada operate a program known as Self-Employed Benefits or Self-Employed Assistance. This program allows you to continue receiving Employment Insurance for about 40 weeks while you get your business started.
5. Get some family support. See if you can borrow money that you do not have to pay interest on right away and do not need to repay right away either.
Assume that your business is not going to break even for at least a year and see if you can fund your living expenses some other way; spousal income, savings, borrowing or family help.