It’s tax time here in Australia, and when people see their numbers in black and white on their returns, many start wondering about going into business for themselves. That makes it a good time for a Start a New Business Holistic Spending Plan.
The most important part of starting a new business is knowing why. Usually, it comes about as a reaction to the soul-sucking life of a wage slave. Or as with me, redundancy and the desire to not be dependent on one single source of income. Anyhow, living with no visible means of support is scary as hell, so you need a compelling reason to get into it.
Live a self-funded financially independent life.
Research and look for the right business opportunity.
Let’s say Independence, Focus, and Stubbornness.
I think this has to be a SMART goal, mainly because I think you need to think really carefully about starting a new business. It can be very easy to lose your house and marriage if it goes pear shaped. Not to mention your self-respect.
Your goal will ideally include an amount of savings, and a level of education.
Basic Spending Plan
We’ll use the same basic proportional plan with the after-tax monthly income of $3,435.
Starting a business is hard work, and it requires sacrifices; the most obvious being a nice reliable income, but it can also be time spent with the people you love, fancy cheese or wine. It’s is not something you should just up and do. It’s something you need to prepare for by researching your products and market and building up a cushion of savings to get you through until you start making some money.
I think the most important consideration is the kind of life you hope to lead. Just starting a new business does not give you the opportunity to winter in warmer climes. Before your business is that profitable, you will more likely be working long and unsociable hours. You might be under a lot of pressure and unable to get a good night’s sleep worrying about how you are going to pay your bills.
Are you willing to put the effort in 24 hours a day, seven days a week, 52 weeks a year for as many years as it takes to build the business to a sustainable level?
The easiest way to get into business is with a franchise (e.g., a McDonald’s restaurant), but these generally have very high start-up costs. Not only do you need to buy the brand and the right to use their processes, but you will be paying monthly fees for support and are probably restricted to buying supplies from them. Plus the ongoing costs of rents, utilities and staff. Franchises can cost as little as a few thousand dollars to start, or (puts little finger to lips) one million dollars.
The best way to get into business is with a trade (e.g., plumbing) or hobby that you can make money from (e.g., jewellery making). While you’ll need a vehicle for a service-based business, you may be able to start with the one you already have. But if you can set up your new business from home with only your supply costs, you’ll be well ahead. And for product or service based businesses, you need to work out how much to charge for the reasonable cost of your time as well as your component.
In either case, there’s a lot you need to learn about the law, taxes and the “back office” aspects like bookkeeping and marketing that keep a business going. And while there is a lot of information available for free from government departments and people trying to sell you stuff, you could also consider “formal” small business management qualifications through a technical college. This could cost $3,000 or more depending on the institution; say $250/month.
You might wonder why you need to save given you can get a start-up loan from a bank. It’s because, credit cards aside, banks don’t usually lend you money for groceries. Also, they may not lend at all unless you have something significant (e.g., your home) to secure the debt. And at any point along your journey, they can cut your access to your own money, call in your debt and sell your home out from underneath you. Avoiding loans where possible is a great idea.
A good financial cushion for employed people is three to six months wages; in a reasonably buoyant job market, this allows plenty of time to find something else. However, depending on your proposed business, it might be several years before you generate enough income to pay yourself a market rate wage as well as cover costs. I’d recommend saving a year or more’s worth of your general living expenses. For our basic plan, that’s about 60% of your income you need to save ($24,732). Unless you hit the jackpot, that’s $2,061/month.
But this research period is also an excellent opportunity to practice living on less money before you need to. And work out what steps you can take if you need to cut expenditure further. Or whether you need to run your business on the side for a year before you quit your job.
So that’s $2,311 a month to set aside.
- Food: I don’t want you to sacrifice your health, but if you can shave at least $25 a week off your food bill, that will give you an extra $100/month. The easiest way is to start by reducing the number of treats you bring home, planning menus, buying food you have to prepare and changing your brand allegiances. And then see if you can save some more.
- Housing: This is a really good opportunity to look at moving somewhere less expensive. Maybe just a smaller house a few streets away, or perhaps a small apartment in a nearby suburb. If you’re planning to run your business from home, take your business needs into account. For example, if you need a space to meet clients in, don’t take a studio apartment at the back of a derelict warehouse.
- Clothing: You may be able to make some significant cuts here. If you’re planning to resign in the next 12 months, you won’t need to buy work clothes. Let’s be brutal and cut this to $150 saving ourselves $365/month.
- Operations: This is the perfect opportunity to think about how you can cut your utilities and fuel costs. Get some quotes from alternative suppliers, and see what you can save.
- Happy Life: Happy Life is the bucket where the things that make life worth living come from, so in this case, we’re looking at what treats we need to keep rather than what we can sacrifice. Life may be pretty austere for a while, so let’s keep $200 a month and save $659.
So I’ve only been able to easily save $1,124, less than half of the value we’re looking at saving, though you still have housing and operations to look at. If you’re able to make those changes, the $1,187 shortfall will help guide your decisions.
And if you’re going to start your business on the side, it gives you a ready-made income target.
This is one potential spending plan, so reassess after a few months to see if it’s working or not:
Start a New Business Holistic Spending Plan
I think this plan has the potential to be brutal. The temptation is to slash expenditure all round, but remember you need to keep it sustainable and give yourself enough small pleasures to help see you through when it seems like too much.
One other piece of small business advice, reassess your business potential after a few months. It’s not a business if it’s not making any money, and if it’s not covering your costs, you may need to work for someone else until it does.
Starting a new business can be the most amazing thing you do in your entire life (sorry DB). But it can be brutal, and you can end up sacrificing the little things that make life worthwhile by working long hours every day. You need to pick something that makes you happy.