3 Important Financial Considerations Before You Jump Into Your Next Business Idea


February 15, 2022
3 Important Financial Considerations Before You Jump Into Your Next Business Idea

Whether you’re a serial entrepreneur or you’re just considering venturing out on your own, you need to lay a solid financial foundation before diving into the deep end. Here are three elements that can help anchor your financial plan. 

#1: Lay the Financial Foundation

Before launching a new business venture, it’s critical to ensure you start on solid financial footing. First, consider how starting a business will impact your personal financial goals. A few questions you may want to ask are:

  1. Do I have enough in cash savings to bridge the gap between starting my business and when I can expect to turn a profit?
  2. Where will my cash flow come from during the “launch” phase of my business? Will I pull from savings, work a part time job, or find another way to pay my bills?

Next, think about how you can set your business up for financial success. Ask yourself the following questions:

  1. Who is my ideal client or customer?
  2. Does the market need or want my services or products?
  3. Where will I find funding?
  4. What expenses can I expect in the first year or two?
  5. How long can I reasonably afford to “coast” on savings and other cash sources while my business launches? 

Ideally, you’ll be able to start your business with a small amount of capital to ensure you aren’t in over your head before you make the first sale. Leverage your network, social media, and any free community resources available to you in order to do market research and test your new business idea with a small sample audience of people who will give you candid feedback. 

Remember: You don’t need to spend thousands to get an idea off the ground, especially if you aren’t 100% confident that your business model will stand the test of time.

#2: Weave a Financial Safety Net

New business ventures are exciting, but they can also come with financial volatility. It’s important to build a healthy safety net to protect you should something go wrong. 

But, what does a “safety net” look like? How do you know if you’ve given yourself a long enough runway to ensure personal and professional success?

The first key step to take is to build up your personal emergency fund. In general, having 6-12 months of living expenses in an easily accessible cash savings account is recommended. However, if you plan to launch a new business, you may shoot for closer to 12-24 month of expenses depending on how long you think it will take to turn a profit. 

Next, start thinking long term. How will your retirement savings goals be impacted by this venture? If you have to stop saving for retirement in the short term to ensure your business’s financial success, make a plan to increase the total amount of funds you’re investing in a few years after your business is more stable. 

You may also need to reevaluate how you’ve been saving for retirement if a traditional workplace 401(k) isn’t available. An Individual 401(k), SEP IRA, and SIMPLE IRA are all options to explore. 

When it comes to ensuring you have a professional safety net, many of the same questions about financial stability apply. Consider building a small, personally-funded “business emergency fund” that you can draw from once your business idea has been validated. The key with creating this fund is to evaluate how long you realistically believe it will take to start covering your expenses with revenue. 

This timeline (and the appropriate corresponding savings) is different for each business. In some ways, determining these numbers should feel a bit intimidating. If you have a clear idea of how much you have saved, and how long you have until you burn through those funds, you’re more likely to be motivated to lean in and grow your business quickly. 

#3: Create a Clear End-Goal

Once you’ve made decisions about how to protect yourself financially while starting your business, it’s time to get clear about your end-goal. Every business owner is passionate about serving their clientele for a different reason – what’s yours?

The path of the entrepreneur is rarely without twists, turns, and hurdles. If you plan to stick this out for the long haul, you need to outline a clear motivation to keep you moving forward when times get tough. Here are a few questions to ask yourself: 

  1. Why am I passionate about pursuing the path of entrepreneurship?
  2. How can this choice be productive financially?
  3. Do I plan to sell my business, use it to fund my retirement, or is it accomplishing another financial goal? 
  4. What do I want my business to look like in 3-5 years?

You can be as detailed as you want to be when creating the vision for your business. When you know where you want to end up, it’s easier to reverse engineer a plan and to set intermediary goals to help you get there.

Bonus: Work With A Trusted Financial Team

At Blue Rock, we’ve worked with many successful business owners over the years and love helping them create a financial plan that helps them grow their business and reach their goals. You can reach out to us with any questions you have by clicking here. We’d love to hear from you!