Assessing Your Financial Fitness
Since it can take months to bring a business to the point where it's earning a profit — or even breaking even — one of the most important factors to consider is money. You'll find tips on establishing start-up financing in Chapter 7; first, however, you need to figure out how much money you and your family need to live on. That will help you to set your business goals and financing requirements.
An honest evaluation of your own finances can do nothing but help you: You might find that you have funding sources, such as antique collections, that you didn't realize you had. Or, you might find that you're on shaky ground and that going without a steady paycheck could put you in earthquake territory. In the latter case, you don't necessarily have to give up your home-based business dream — but you might want to lengthen the time frame to give yourself some time to strengthen your foundation.
If you don't currently know how much money your family spends each month, and on what, you need to figure it out. The easiest way is to track all your spending in some kind of diary for a full month, separating it out into various expense categories, such as rent, car loan payments, and groceries. Include everything that you can think of, including children's allowances, and even payments such as vehicle registration that might come up only once a year (just divide the expense by twelve) — and then add it all up.
Now consider all your income sources, such as investment dividends, your pay, your spouse's pay, and pensions. What happens when you remove your paycheck from the equation? You need to make sure you account for this when deciding how much financing your business needs in its first few months and where that money's going to come from.
One of the biggest financial risks you face in starting a home-based business is bankruptcy, which — depending on your business structure and which state or province you live in — could take a large chunk of your family's personal assets, from vehicles to a portion of your family home. You need to be very clear on the level of financial risk that you're taking on.
For help assessing your personal finances, especially if you need to reduce your debt, check out
One way to measure whether you're financially fit enough to take on a business is to look at your family's net worth. Total all of your assets (home, vehicles, furniture, savings accounts, retirement savings plans, investments, etc.) and compare this total to the total of all your liabilities (how much you owe on mortgages, vehicle loans, credit cards, etc.). If you owe more than you have in assets, you're in the red — you need to look at your own finances before you start managing those of a business.
Now that you know where you're starting from, assess where you want to go. Do you dream of a rich-and-famous lifestyle, or are your goals more modest — a comfortable living with reasonable provisions for future needs, such as kids' college educations and retirement? Maybe you've always wanted to retire early, or perhaps just need some extra income to add fun to the family agenda. Do you truly want a home-based business lifestyle, or do you see it as a springboard to something else? Answering these questions will help you to figure out what kind of income your home-based business needs to provide.
If money is an issue as you start your business (and it is for most people), look at your lifestyle. A regular salary can be a very comfortable concept, whether it's funding a large latte on the way to work or a new car every couple of years. To make launching a business more financially viable, examine where you could reduce your living expenses. This can be as complex as reducing your debt or as easy as renting a video instead of heading to the movie theater.
While you might feel pinched at first, thinking of this as “buying back your life” will make it easier — you're giving yourself the chance to be your own boss, and the satisfaction of building a business from the ground up. And you don't have to give up all treats; in fact, you shouldn't…that just leads to resentment and frustration. Consider scaling them down, instead (takeout instead of restaurant dining) or find treats that don't cost much (Shakespeare in the Park instead of the opera's opening night gala). Just make sure your family's involved in deciding which changes to make to ensure that you have their support.