Managing your finances until your business takes off

When setting up your own business, one of the biggest challenges is to hit that magic “it’s working” point. The point where the service or product we are offering is being bought, we are starting to earn some money, and we can see that giving up the day job was in fact a good idea.

Depending on what sector you are in, and what service or product you offer, the time to hit this magic point varies. The Federation of Small Businesses reports that 1+ years is a common time period before a small business starts to break even and turn to profit.

So, the big question is – how do we manage until the funds come in? Read on to find out…

Planning the breakeven point – predict it at the beginning

I have had three businesses go through this cycle, and support hundreds of small business owners to do the same. One of the biggest pitfalls for us in the early days is that we believe the hype and are overconfident with our predictions. It’s easy to read the marketing blurb of the franchise we have just bought or read the success stories of those who have set up similar businesses to ours, and to think – “that’s how it will be for me.”

Very few people write frankly about the ordeals, the struggles and the time it takes to become fully established. Know that, unless you are in some very fortunate or unusual sector, it will take some time until the earnings are established – and then plan accordingly.

Here are some plans you can put into place at the beginning...

Talk to your family. Let them know that the new venture will take a year + before you return to some sort of normality, and to encourage a bit of thrift. Mutual acceptance that this isn’t the year for the new holiday/car/facelift.

Start at the right time. Starting your business at the time when you are in great financial need (are the only earner, have a big mortgage, kids have just gone to private school/uni, you have an elderly relative to look after.) is also less helpful. Perhaps bide your time until there is less pressure.

Reduce your expenses. Where can you cut down without a great impact? In the last recession there was a TV programme called “pay off your mortgage in a year” and the presenter had families living off porridge and water. That’s not what I mean!

Doing the things that we ought to do but never get around to (checking and switching utility provider, taking care of our car to reduce these costs, reviewing unnecessary direct debits, cancelling unused subscriptions, giving away the dog (not really!)). The motherlode – have a family budget and stick to it!

Decide where your start-up capital will come from

Before starting one business, I was advised that I should use our savings or redundancy money to keep me afloat in those first couple of months before we start earning. This is not helpful for a number of reasons: it wasn’t a few months but over a year! The frustration of seeing hard-earning wages/redundancy was hard to bear, maintaining a positive energy in sales environments when the money was running out was tough!

If it’s not redundancy money that will fund your life until your new business kicks in, then what? Read on for suggestions.

Make your start-up a “bootstrap”

This slightly awkward terminology (I use it so that you can search it and see all the good ideas out there) effectively means that a business is started with a rule of thumb that says, “no expenditure unless absolutely necessary.” Some things we can do to help that along include:

• Use as many items as possible that are on “Freemium” i.e. no payment for the limited service – think Dropbox, Mailchimp, Skype.
• Learn as much as you can to do business essentials, including accounting, designing flyers, planning marketing
• If you have to pay for a service, go to a low cost marketplace such as peopleperhour.com or fiverr.com to find a provider
• Follow a low cost or self-study programme that teaches you all the business essentials. In the coaching world, we offer one to coaches that is comprehensive, and free.

Increase your (relatively passive) income

Can you do something simple to increase your income? Take in a lodger for the spare room or sign up to be a host home for overseas students? Sign up to quidco.com  or a cashback loyalty scheme, when you spend money online you get money back? Change your credit card to one that gives you cashback or discounts?

Have a supplementary form of income that you can maintain through the early days 

This is the big one for quicker income generation.

If you have a skill, a profession or a trade that you can earn from, on a day rate basis or similar, it’s worth keeping doing this for two days a week or so. Perhaps these skills relate to your previous job role:

• School leaders doing supply teaching, education consultancy, tutoring.
• HR managers providing HR consultancy.
• Accountants or similar providing bookkeeping services.

And perhaps the skill you have doesn’t relate to your previous career but is something you have learned and is saleable. Some examples:

• freelance writing
• DIY and gardening services
• making and selling arts and crafts
• teaching or coaching a sport or well-being activity

Final words

Setting up a business or going self-employed is a good opportunity for autonomy and flexibility, and if successful, brings lots of benefits. The early days are tough times and need careful management. If you set the business up during a tough time, such as the 2008 crash (when I set up my first business!), or the 2020 coronavirus crisis, it’s even more important to do the planning well.

These are proven ideas, so pick the ones that you think will work for you and start reducing the stress of these early days of setting up a business.