Part of the America’s Entrepreneurs Special Report
(This article previously appeared on Rewire.org.)
How much money should I squirrel away before launching my business? Is there anything wrong with going into business with a friend or a family member? Can customers be investors?
Rewire readers had lots of questions about quitting your day job for entrepreneurship professor and expert David Deeds, who teaches at the University of St. Thomas Schulze School of Entrepreneurship and is the editor-in-chief of Entrepreneur & Innovation Exchange (EIX). He answered them during Rewire’s a Facebook Live Q&A.
Watch Rewire’s Maribel Lopez ask Deeds the questions Rewire received about launching a startup below. But if you don’t have time to watch the whole thing right now, highlights from Deeds’ Q & A session are just under the video.
So how do you know when you can quit your day job and start a business? Deeds had three important insights:
1. Make sure you have more than enough funds to set out on your own. When you’re figuring out how long you’ll have to work two jobs before you can quit your day job and turn your focus entirely to your business venture, be sure to factor in months of financial buffer for yourself, Deeds said. That way, even if your business hits a rough patch early on, you’ll be able to pay your bills.
All new businesses “bleed cash for at least six months or a year, maybe longer,” Deeds said. Your utility companies and your cellphone company aren’t going to cut you a break on your bills just because you’re starting a new business.
Deeds put together a handy formula to follow to figure out “your runway,” the number of months you’ll have to work both jobs before you can quit your day job. Download it here.
2. Remember that first-time ventures often fail. Often, an entrepreneur will take a business to market only to find that it wasn’t quite right and then it doesn’t become successful.
So the more money you save ahead of your business’s launch, the more tries you can afford to finance if your first attempt fails. You’ll be able to go back to the drawing board and tweak your idea without having to worry about cash in the meantime.
Deeds said many entrepreneurs who fail the first time blame it on not having enough money. In reality, “half the ideas are lousy, half ran out of money,” he said.
One tip that Deeds repeated was to start financial planning way ahead of time —long before you’re even thinking of quitting your day job. In this tricky business, there’s no such thing as being too prepared.
3. Finally, keep your personal and business finances separate. When you’re starting out as an entrepreneur, it’s important to keep your personal and business bank accounts apart, Deeds said.
Although both business and personal bills need to be paid every month, keeping your accounts separate will make it easier to track your income and outflow —absolutely critical for building a viable business.
You’ll need to keep records of every single business transaction you make (Deeds recommends QuickBooks for this, or hiring a bookkeeper or accountant on an occasional basis.) Create this business account as soon as you launch your venture, but build a relationship with a banker way ahead of time.
Next Avenue Editors Also Recommend:
Katie Moritz is the web editor at Rewire.org, a site from public television station TPT that creates smart, fresh, original, thought-provoking content that inspires individuals to make their lives better. She formerly covered politics for a newspaper in Juneau, Alaska and helped produce the public affairs show “Almanac” at Twin Cities PBS. Reach her via email at firstname.lastname@example.org. Follow her on Twitter @katecmoritz and on Instagram @yepilikeit.@katecmoritz