Being an entrepreneur is a dream for millions of people. If you've been thinking about giving your two weeks' notice and getting to work on the startup you always wanted, you should be aware that entrepreneurship is an exciting but risky path to journey on. Millions of businesses fail, and owners can end up with their finances and lives in shambles if they're not careful. Here's what you need to ask yourself before you decide to take the plunge and become a business owner.
1. Do you explicitly understand what you want out of your business?
Obviously, you'd like to make money and get your idea out there. But what is your actual goal? Do you just want a comfortable living, to provide a service your community needs, or to make the next big app?
Figuring out what you want in business and life will help you decide how to shape your funding and business plans.
2. Do you understand the legal requirements of starting a business where you live (or plan to relocate to)?
You will need to start a business entity that makes sense for tax and legal requirements where you live. Do you need permits or licenses before you officially open for business? Run a compliance check with an attorney to make sure you're going about the startup process correctly and filing all paperwork on time.
3. How much do you want to grow your business?
Many people get it in their heads that they have to become the next Steve Jobs. Otherwise, why bother starting a company if they don't plan on getting a huge office with lots of employees?
You don't have to! Growth isn't a be-all and end-all issue. You can determine how much your business needs to grow and scale and decide where you'd like to stop. If you want to make an app that becomes a public company or gets bought out by a different one, you're considered a startup. If you'd like to become a web publisher and not grow to more than one to two employees, it's perfectly OK to be happy being an SMB or solopreneur working just for yourself.
Regardless, discussing your growth goals with a qualified accountant can help. They’ll be able to help you set up the right financial metrics to continuously track and get your business on the path to your goal size.
At the end of the day, remember that you can always change your mind as your career and lifestyle priorities change.
4. Are you and your loved ones ready to weather the ups and downs of entrepreneurship?
If you don't have to factor a family in with your business decisions, it can be pretty easy to figure this part out. But either way, you're about to make a huge lifestyle change—whether you realize it or not.
The divorce rate for entrepreneurs is well over 50%. This is often due to financial strain in the early stages of starting a business, especially if your spouse and children are affected by you taking a pay cut to work on your new venture. Even if you succeed, you can find it hard to relate to your spouse if they’ve worked a normal job all their lives. Your family and friends may find it impossible to weather this journey with you, so you need to be prepared for the ramifications.
5. How much capital do you actually need to get started, and how do you plan to acquire it?
Depending on the type of business that you want to start, you may need a significant amount of startup capital or not much at all. It's traditionally been thought that you need a very large amount of money to open a business, but laying the foundation for a digital business has incredibly different cash outlays than opening a restaurant.
One-third of small businesses start out with less than $5,000, with 77% of all small business owners relying on their personal savings to fund their ventures. This could encompass anything from savings accounts to tapping into assets like retirement accounts, home equity, inheritances, divorce settlements, or selling your car or home. Depending on how much you'd like your business to grow, you might not need to seek outside capital at all, at least for the time being.
6. What is a reasonable estimate for your burn rate once you get started?
Insufficient cash flow, often caused by insufficient capital, is one of the leading causes of business failure. But capital can only go so far if you just don't have any customers yet.
A restaurant will have a higher burn rate than a digital store but could have customers immediately, depending on the location. You can also develop a top-notch product for months but forget to test it with potential clients.
Keep in mind that your personal expenses also won’t go away, so you’ll need to carefully account for them in a reserve if you’re going without income for a protracted time frame.
7. Have you done your research on how viable your business idea is?
Just because you always wanted to open a nightclub in your town doesn’t mean it’s going to make money.
Have you done market research in your area? Have you found out who your competitors are and how you differentiate from them? If your business idea isn’t viable, it's time to pick a new one.
Entering the adventure of entrepreneurship is exciting, nerve-wracking, and risky — but when you approach it the proper way and know your answers to these questions ahead of time, you are much more likely to be successful in the long-term.
Sonu Shukla, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
