When you think about work, do you picture yourself in a cubicle? Or are you one of many who desire a home office? Whether working in an office building or your home, each option has its own challenges. According to the U.S. Bureau of Labor Statistics, sole proprietor business owners were responsible for 99 percent of the increase in job growth since 2000. But, before you say good-bye to the office and go out on your own it is important to consider the personal and financial implications of owning your own business.
Are you ready to be a small business owner?
Running your own business can bring great rewards. But for every successful business owner there is someone who jumped in too soon.
• How do you handle financial uncertainty? The unsteady cash flow generated from a small business can be difficult for those who like the security of a steady paycheck.
• Who is your competition? Make sure you not only know your competition but also what differentiates your product or service from the rest.
• What is your marketing strategy? As a new small business owner you will need to spend as much time marketing yourself as actually doing the work. Consider how you are going to do this and if this is where you want to spend your time.
• How patient are you? When starting up a new business assume everything will take at least twice as long as you planned.
• How disciplined are you? Not everyone works well with a fluid schedule and no deadline pressures from the boss.
• What work environment works best for you? Some people thrive in a home office where they can focus on work with no distractions, some need the social connections and collaboration opportunities of a team.
If you considered the questions above and still want a business to call your own, it is time to plan.
Focus on finances
Although not the only important component of a successful business, financial considerations can often make or break a new business owner. This is where the services of a financial professional can be a good investment.
• Determine monthly living expenses – Err on the side of over-estimating monthly expenses. Determine where you could make cuts and consider what reserves you have for slow months. Remember, when you are in business for yourself there is no guarantee of a steady income for those monthly bills.
• Health insurance – You may need to adjust your expectations about the type of coverage you need and the cost. Leaving a group insurance plan means different coverage options and no more employer subsidies to help cover the cost.
• Start-up funding – Start up costs and extended periods without a paycheck may necessitate assistance from investors or you may need to consider a small business loan. Also, become familiar with the type of credit available to you, for example, secured and unsecured lines of credit.
• Cash flow projections – The formula for cash flow is total revenue – total expenses. But, both revenue and expenses can be a moving target. After looking at monthly income and expenses, take a look at the year ahead. Are you a seasonal business? Consider the effect on your cash flow during months with low sales.
• Business accounts and bookkeeping – Establishing business accounts separate from personal accounts is a must. If accounting isn’t your area of expertise, hire someone who can do it for you. This will become even more important for employee payroll purposes if your business expands.
• Investing in your business – Know when to invest profits and when you should put them back into your business. A skilled money manager or accountant can help with this important decision.
• Retirement – When you no longer have access to a company’s 401(k) match or retirement plan, you need to take even more responsibility for your own retirement. Work with a financial professional to establish a traditional or Roth IRA or to find if you qualify for a SEP or SIMPLE IRA or Owner-Only 401-k for small business owners.
If you do your research and make a plan, you could be one of the more than 23 million small businesses operating in the U.S.
For more information on starting a business, go to the www.sba.gov website.
This article is provided by Pamela J. Carty, a Financial Advisor at RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC