Your entrepreneurial spirit is ablaze and you’re ready to plunge into the uncertain world of self-employment. But is your bank account equipped to relinquish the security of steady income?
If you can say “yes” to the following entrepreneurial money milestones, you may be ready to quit your day job and start your own operation.
You have actual numbers behind what your business will cost, and what it will potentially earn. Nancy Butler, a certified financial planner and founder of Above All Else, Success in Life and Business, says that a solid business plan can reveal hard facts around whether your bank account can handle the initial stresses of self-employment. Not only will this document be required if you intend to apply for small business financing, it will reveal the expenses you’ll face in the startup phase and in coming years. Consider costs for marketing, payroll, technology, supplies, production and operational expenses, and then determine how you intend to fund these expenses. Using these figures, estimate expected profits and when you might see them start to come in. If the numbers make you nervous, keep your day job for now.
Your bank account can handle a tough year. Butler says to amass at least 12 months of cash reserves: six months’ worth to carry family income needs, and six months of cash to float business expenses. Use past bank account statements, budgets, and your business plan to determine how much money you need to have saved, assuming your business doesn’t produce any income for at least six months. If you have at least the total of both figures readily available in a deposit account, you may be financially ready to fly the full-time coop.
You have no aspirations of major personal purchases in the near future. Quitting your day job means losing the security of a full-time paycheck — and the validation of your income that mortgage lenders and auto finance companies seek. Be certain that you are willing to put off such purchases for at least a year.
You understand basic self-employment tax laws. Tax accountants are a great resource, but their advice doesn’t come cheap. While you should certainly use their expertise when you can, it’s your job as an entrepreneur to understand the financial impacts of self-employment tax laws, especially the estimated quarterly tax payments you’ll be required to pay the IRS. Determine how much money you’ll need to set aside for them, and add this figure into your year of cash reserves total to ensure that you can pay your estimated taxes on time, even if the business doesn’t generate the profit you predicted.
You’re willing to give up discretionary spending — for now. Business ownership is a lifestyle choice, and it requires some sacrifice. Butler says that you may need to put money back into the business as you go; profits don’t automatically end up in your pocket. If you’re willing to forgo spending on unnecessary luxuries in order to invest in the health of your business, you may be ready to be your own boss.