It is easier to say you will save money to start a business than it is actually to do. Some resources recommend stashing away 30 to 40 percent of your paycheck to grow your saving.
Is that possible for you? You may not think so, but review to the sections below to learn why you should save money to start your business, how to know figure out how much to save, ways to reduce the amount you need to save and tips for saving money before starting a business.
People who start businesses without the overhead of debt or the intrusion of concerned investors have more options and more control over their new company. Starting a business with a loan, or financing startup costs with a credit card, cuts into your profits immediately. Early on, when revenues are small and inconsistent, you need to keep all the income you possibly can.
Entrepreneurs who seek out investors to put up the money needed to get started. This can lead to awkward or contentious “partnerships” that the new business owner did not anticipate. In the interest of protecting his or her investment, the investor may want to have a say in critical business decisions. Using your own money means you retain 100 percent ownership, and you have avoided interest charges and monthly loan payments.
Calculating how much you need to start a new business is challenging, but it is more time consuming than it is difficult. Rounding up some detailed information, consulting with seasoned entrepreneurs and trusted people in the industry can help you formulate an accurate estimate of how much money you will need before you are open for business. Some important things to remember when calculating your startup expenses include the answers to the following questions:
Next, you need to set aside savings for operating expenses. This is the cost of running your business monthly. In the beginning, your sales may be slow and income will be meager, so it is crucial to have reserved money to help you get through the first few months.
Lastly, if you plan to quit your job and apply yourself fulltime to your new business, then you will need at least six months of personal living expenses as an emergency savings fund. Chances are your new business will not generate enough profit to cover your salary.
After establishing how much money you will need, go back through your list to see if there is anything you can eliminate or reduce. Make sure only the essentials made your list. Cross out anything that you can do without. For example, there is no reason to buy a receptionist’s desk when you do not plan to hire a receptionist. If you plan to hire two men for your tree cutting service, then you only need two chainsaws, for now.
After deleting the non-essentials from your list, look at other ways you can save on the startup costs. Are there services can you get for free or products and services could you get by trade or bartering? Is there something on your list that you could borrow from a friend or family member? Instead of borrowing, is it something you could rent? Remember to borrow before you rent, rent before you buy and buy used instead of new to save money. Watch your industry for bankruptcy auctions and going out of business sales to find great deals on business equipment.
Now that you have calculated an amount as a savings goal, you need to find ways to cut costs from your monthly expenses to free up more money for your savings. Take the time to consider this list of ideas. Which ones will work for you?
Negotiate discounts when you go shopping – According to Consumer Reports National Research Center, 89 percent of shoppers who negotiated for a better price were able to get it. Look for flaws in the product and ask for a discount (think scratches and dents). There are other price-shopping tips available to reduce expenses.
Eliminate high-interest debts – Those credit cards are costing you more money than you are saving. Look at how much interest these debts cost you each month. Compare that interest to the interest you are earning on your investments or savings. If the first is noticeably bigger than the second, then you are losing money faster than you are making it.
Stop eating and drinking out – The cost of a night out for dinner or a couple of nights of carryout are much higher than the price of groceries and cooking. Eat dinner at home and pack a lunch for work. It is also significantly cheaper to purchase an alcoholic beverage to drink at home, than buying drinks out at a bar or nightclub.
Cut costs on household utilities – Turn down the thermostat. Turn down the water heater. Consider watering your lawn less often. Negotiate with cable TV and cellular provides for better rates.
Resist buying a new car – You may enjoy a new car every two or three years, but resist the temptation of a shiny new car and drive the dependable ride you already own.
Avoid “same as cash” credit deals – These 90-day, six-month, and 12-month no-interest sales for purchases on your store credit card are dangerous. If you miss the payoff deadline, then you are strapped with all the interest of the initial purchase, and it is usually at a very high rate.
Cut back on the little things – Drive through coffees, muffins from the cafeteria and pay-per-view streaming movies add up to surprisingly substantial costs each month.
Eliminate non-essential expenses – If you can do it yourself or do without, then consider dropping it as a means to lower your cost of living. This includes items like premium cable, laundry service and the extra vehicle.
Finally, consider setting up automatic deductions from your paycheck into a savings account. It is easier not to spend money when you never see it.
Having a household budget can help you identify areas where you may be overspending and can also help you manage your personal finances. All of these tips will not work for everyone but committing to as many as you can may help you reach your goals faster. When you are able to start your business, you will have experience with the discipline needed to responsibly manage your money.