Entrepreneurship is exciting; but starting your own business full-time without the right financial footing can leave you with regrets. Here's how hopeful business owners can prepare.

Making the leap from a side hustle to staring your own full-time business is a big move. You gain your freedom and more control over your schedule and projects. Yet you also assume complete responsibility for your own financial future.

If you currently have a side business—or are an occasionally freelancer—and are thinking about making the move to a full-time entrepreneurial career, preparing your finances can alleviate pressure and help you focus on building your business. Here’s a five-step process that can help you become financially ready to start a business full-time.

Assess your baseline expenses

How much does it cost you to pay your essential bills each month?

When you’re living on a steady paycheck, there’s a chance that you’re less dialed into the specifics of your budget. Often, it’s more along the lines of “Budget? What budget?”

Take stock of your complete cost of living, including rent, utilities, food, and other miscellaneous costs. Then include line items for things you’ll have to pay when you’re in business for yourself: health insurance, business insurance, and self-employment taxes come to mind. Keep in mind, you will need to set about 35 percent of your self-employment income aside for taxes, so set your rates accordingly.

Beyond that, think about entertainment budget, travel, an emergency fund for things like car repairs, saving for retirement, and other long-term goals. Once you’ve put together a plan, total it up and then divide by 12, which will give you a sense of what you need to earn each month.

You can break that into weekly revenue targets, daily income goals, and minimum hourly rates. It’s a lot easier to freelance or run a business successfully when you understand the number that you have to hit. That has an impact on how many hours you need to work, the clients you pursue and the projects you take on.

Save, save, save

One of the hardest areas to get under control when you’re first starting a business full-time is your cash flow. It may take clients awhile to pay you or to drum up business. There may be unanticipated startup costs from licensing your business to purchasing equipment.

Money in the bank is the biggest asset that self-employed entrepreneurs can have. It helps you weather dry spells and client storms, and eliminates stress which helps you focus on building your business.

How much should you save?

For every entrepreneur, it’s an individual decision. How much money you need in the bank depends on a range of factors:

  • How much do you spend each month?
  • Do you have fallback options, such as a partner with benefits and a dependable second income?
  • What’s your personal risk tolerance?

Three to six months of expenses in the bank (even if that means minimizing fun spending and scaling back your lifestyle) gives you reasonable runway to get started. Saving a year’s worth of expenses can eliminate worry, free you up to do your best work, and give you a solid chance of making your business work.

Understand your tax situation

Self-employment taxes are a whole different ballgame then when you’re working for someone else. When you hold a regular W-2 job, your employer deducts taxes for you and pays them. You file your taxes at the end of the year and settle with Uncle Sam for a refund or small payment. Everything changes when you’re an entrepreneur.

You will have to pay quarterly taxes, cover your own self-employment tax, and face the possibility of additional local business taxes.

Make sure that you understand what your obligations will be and that you’ll have the cash flow and focus to pay on time. It’s worth getting this right from the beginning, to avoid penalties, interest, and time wasted on the IRS that could be spent generating revenue.

Look at your client base

Do you have the predictable promise of client work to help ease the transition to being a full-time business owner?

In other words, it’s a lot easier to go out on your own when you have clients who are eager for your work. Consider whether you’ve got clients who would be anxious to fill additional capacity or whether you’d need to market aggressively.

If marketing or pitching is in your future, take a closer look at your success rate. Are you hearing back 5 percent of the time, 10 percent of the time, or landing 25 percent of the projects that you quote?

Thinking about your current client load and pipeline—and how much time and effort it will take to scale up to full capacity—can help you make decisions about timing. For example, you may spend a month or two marketing heavily before you take the leap so that you’ve got projects or warm leads lined up for your first day of freelancing.

Have the systems in place to manage your finances

As a full-time business owner, your financial situation is going to quickly become more complex than ever before. You’re suddenly tracking invoicing, expenses, payments, late payments, quarterly taxes, and more. It can sound overwhelming—but it doesn’t have to be. The right systems can help. Think about investing in:

  • Invoicing software like Freshbooks that lets you send invoices
  • A financial management package like QuickBooks or Xero to help you track income and expenses
  • A project management solution, such as Trello, Slack, or BaseCamp to stay on top of projects

Typically, these systems are tax deductible. There’s a range of options on the market, from basic and free solutions to highly customizable premium packages. Start with the basics, and then scale up as your business grows if needed. Putting systems in place before you start helps you keep your financial management under control without eating up too much of your work time.

Finally, consider sitting down with an accountant or CPA to review your financial situation, your long-term plans, and whether you’re financially ready to work for yourself full-time. The investment usually costs a couple hundred dollars. What I’ve personally found is that a financial expert will be able to quickly help you identify gaps in your plan, blind spots you missed and do a reality check.

Summary

Often, when you’re planning the move to running your own full-time business, the smallest things can make a big difference. Staying at your job for an extra two months may qualify you for a retirement match that nets you thousands. Saving another month or two of runway may take significant pressure off. Doing a gut check with an expert will make sure that your financial picture is as strong as you hope and that you’re anticipating the most important variables.

What did you do to become financial ready to start your own full-time business? Let us know your best tips in the comments below.

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2 comments
Cynthia says:

I just want to second the major points in this article. I took the leap last year and hadn’t planned far enough ahead. More savings would have eliminated my stress. Developing a plan around niche and cash flow would have smoothed my landing. Ultimately, I figured it out but I had to work harder than ever before to make it work. Plan ahead and you’ll have a much better time of it.

Last time I started a business was right before the 2008 great recession. It took much longer to ramp up than I anticipated. I had both significant savings (over a year of living expenses) set aside as well as a second income from Ms. Financial Slacker’s full-time job to keep things going.

Before the business took off, I wound up getting a corporate job that was too hard to resist. It was a good job that I had for 6 years. Without the startup business, I never would have gotten the corporate job.