Photo, file: AP Photo/Elise Amendola
By Emily Chase Smith/Credit.com
Ah, the excitement of a great business idea. You can see the yellow brick road spread out before you. The future has never looked brighter. But you ask yourself, is now the right time to launch? Am I ready? Here's how to tell.
Once you have the product or service dreamed up, the question of money will arise. Even the smallest online business takes some capital to start -- for websites, software, supplies. A service-based business might need an office and a skeleton crew. Big brick-and-mortar dreams may take hundreds of thousands of dollars to launch.
Money and business go together like spaghetti and meatballs. A business with no funding is just an idea, so knowing if you're ready to launch is a question of knowing where the money is coming from -- for you and your business.
Food on your table
Photo, file: Spencer Platt/Getty Images
The first question is: Will you run this business alongside your current job -- giving you more money, but less time? Or will you quit your job and make your business your main gig -- less money, but more time? Chocolate or vanilla? There is also a chocolate/vanilla-swirl option, going part-time or moving to a less demanding job while you get your business up and running.
One of the very worst positions to be in is to have a great business, one that shows much promise, but to have to abandon it so you can feed yourself. It's a tragedy. Knowing how what you need to support yourself is vital to knowing if you're ready to start your business.
Count the cost of your current lifestyle and either downsize it in favor of your business, or figure out how to pay for it while you give your business time to grow.
Feeding the business
Photo, file: iStockphoto
The travel adage goes: Take twice as much money and half as many clothes. You know that's true from personal experience. The business adage goes: Plan on your business taking on twice as much time and twice as much money. No matter how clever your business plan or carefully laid out your marketing, it will take twice as long as you expect to get your business up and running and paying you. No matter how careful you are with a dollar, there will be costs you hadn't anticipated.
In my years as a bankruptcy attorney, I saw so many smart, hard-working business owners with great ideas run out of money. Give yourself lots of wiggle room on the financial side to meet the challenges you will face. Having a safety net not only makes running the business smoother, it saves you a lot of grey hair. Just as in "Survivor," where fire represents your life, cash is the lifeblood of your business. When you're out of cash, you're out of business. Know where your next meal is coming from.
The key is in the runway
Photo, file: ROBYN BECK/AFP/Getty Images
There's a simple calculation that puts together what you need to feed yourself and what the business needs to take off and lets you know exactly how long you have to make a go of it.
Think of an airplane taking off. The length of the runway determines how long the plane has to get off the ground. When the plane is out of runway, it's out of luck.
To calculate the "runway," you need the following (and a calculator):
- The actual amount of income your business generates (it may be zero for a period of time), called "business income"
- The cost to run your business, i.e., your overhead, called "business expenses"
- The actual amount it takes you to support yourself and those who rely on you, less any other income you may have, i.e., a job, spouse's income
Compare the first two -- your business expenses to business income -- and you're going to get either a positive or negative number. That means either your business is making money or needs money to run, i.e., it's feeding you or you're feeding it. It's not a tragedy if you're feeding it, but good to know.
Let's presume you're feeding your business, because every business needs to be fed for a while. That means you need to add money to the pot to keep the business running. You need to know where that money is coming from.
Now remember, while your business is launching, you also need to eat. Both you and your business are eating. The exact number comes from taking the amount your business needs each month and adding it to the amount you need. We'll call it "the nut."
Let's see what we have in the fridge to feed both of you, to make your nut. Where are you going to pull the cash? Here are the most common options:
- Credit cards
- A business loan
- A personal loan
- Borrowing from friends/family
To get your runway -- the amount of time you have to run your business -- add up all the potential investment money from all those sources, divide it by "the net." That gives you your runway in months.
Your runway calculation tells you exactly how many months you have to make the business a success. As things in your business and personal life change, you can re-do the calculation and hopefully the runway gets even longer. Your business is successful when it feeds itself and also feeds you.
The best time to start a business is when you have enough runway to get your airplane/business off the ground.
When you know you have the money that allows you the time, you're ready.