After years of running the proverbial rat race you’re thinking of starting a business. Maybe you’re working in a career you’re no longer passionate about. You might even be considering the switch after a layoff. If your 9-to-5 isn’t working out for you, entrepreneurship might seem like the way to go. But before you hang out your shingle, make sure you have a solid financial plan in place.
Attorneys Mawuli Davis and Robert Bozeman of the Decatur, Georgia-based Davis Bozeman Law Firm took the entrepreneurial leap in 2007. After graduating from Georgia State University College of Law in 2002 and 2001, respectively, they each started working for large law firms in the area. In November 2004, Davis left to start his own firm.
“I was a solo practitioner for about two years and then Rob joined me and we formed the Davis Bozeman Law Firm,â€ says Davis.
There are important steps you must take before starting a business. Read on for tips on how to successfully make the transition.
Establish emergency savings beyond the traditionally recommended amount.
Kim Bourne, a certified public accountant and financial planner at New York-based Playfair Planning Services, suggests having emergency savings available before opening a business, so you can be prepared for the time between starting up and making a profit. Bourne suggests having 12 to 24 months of savings. Potential entrepreneurs should have two separate cash reserves: one for personal emergencies and one for business emergencies, says Robbie Bishop-Monroe, managing partner at business accounting firm Bishop Hampton & Associates L.L.C.
“Some businesses are capital expensive, so I would suggest aligning personal reserves with the profitability in their business plan,â€ says Bourne. “Start by tracking personal expenses on a month-to-month basis as well as estimating how much it will take to run the business each month.”
Reduce spending. “I didn’t spend a lot before starting the business,â€ says Bozeman. “This isn’t the time to buy a new house or car. I have [employees] who depend on me, and they have to get paid before I do,â€ says Bozeman. The duo also made sure to get a handle on personal debt. Both Bozeman and Davis paid off their car notes before starting the business, and Bozeman and his wife decided not to enroll their children in private school.
Work with a team of financial professionals. Davis and Bozeman employ financial planner Bishop-Monroe, an accountant, and a tax attorney. “We communicate with all of them quarterly,â€ says Davis. Bishop-Monroe says all business owners should have a lawyer, a certified public accountant, and a financial planner.
Have a risk management plan in place. “Risk management measures like insurance, both personal and liability, are always a good way to go,” says Bourne. She also suggests choosing the right entity type, such as an L.L.C. or corporation, as another layer of protection. “Also think about the assets you own, such as real estate, and title everything in a way that protects you from legal issues,â€ says Bourne.
Keep business and personal finances separate. Having a separate business bank account will prevent confusion when it’s time to pay bills or payroll. In addition, it is vital to incorporate your business as a separate entity. If you don’t, you risk losing personal assets if you get sued.
Stay marketable. Have a realistic backup plan in case your venture doesn’t become as profitable as originally planned. Bourne suggests that business owners keep pace with their personal skill set. “You have to stay marketable, keep your rÃ©sumÃ© updated, and make a conscious effort to stay employable, says Bourne.Â “When you’re employable you don’t worry as much about business.â€Â
Stay tuned for part two of this article to learn how Mawuli Davis and Robert Bozeman saved money during the start-up phase of their business.