Creating a Financial Safety Net Before Starting Your Business
- Akino Davis
- Nov 24, 2024
- 6 min read
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Are you worried that your new business won't have enough money to work? You're not alone in having this fear. This anxiety is common among professionals making the transition to entrepreneurship and is a significant barrier to making the change.
The Real Problem: Uncertainty with Money
The idea of leaving a stable income and diving headfirst into business is scary. I remember talking to a recent client. Despite his passion and years in his business, his biggest fear was not having enough savings to sustain himself as the business took longer than expected to succeed. The uncertainty about cash flow kept him up at night. He didn’t have savings to draw down and felt desperate to return to employment.
Many aspiring entrepreneurs face this same dilemma. You might feel ready to follow your dream, but money concerns keep your feet firmly planted in the “safe zone.” The thought of unpredictable income and having bills piling up without a regular paycheck can be daunting.
Common Mistakes When Creating a Safety Net
People in this circumstance frequently resort to fixes like overly optimistic budgeting, assuming that their business will turn a profit in a matter of months. I've witnessed some new entrepreneurs deplete their savings, undervalue expenses, or believe they can cut corners by completely ignoring the appropriate safety net.
They frequently resort to loans or credit cards because they believe these to be simple "backup options." Let's face it, though: increasing debt can strain you and your company unnecessarily before you even experience steady cash flow. Without a contingency plan, relying solely on credit often leads to more stress than stability. You might wind up having restless nights worrying about the next payment rather than being able to concentrate on growing your company.
The "side hustle safety net" is another strategy that is frequently tried. Many new entrepreneurs think they can continue to work part-time at their full-time jobs and build their businesses on the side. Don’t get me wrong, many can. I have done this and it is a good way to test and prove your business concept and demand.
The problem is that it takes time and effort to launch a successful business, and splitting your attention without a proper plan frequently leads to decreased productivity and increased burnout.
Building Your Financial Safety Net: A Better Approach
Let’s talk about some strategies that will work better and help you sleep at night while you transition into full-time entrepreneurship.
1. Know Your Numbers
The first step is to become very clear about your expenses. How much do you need per month to meet your basic needs? This is not the time for aspirational budgeting; instead, be realistic about how much you need to cover rent, utilities, food, and other necessities. Include a small cushion for any unexpected expenses.
Now multiply the monthly figure by at least six. That's how much you should have in your savings account before leaving your job. Six months of living expenses as a cushion will give you enough time to build your business without worrying about money. It's not about living lavishly during this time; it's about giving yourself enough breathing room to grow.
2. Build a Runway
Think of your money as a "runway." It allows you to devote all of your time and energy to your business without being distracted. Recently I had a discovery call with a transitioning entrepreneur, who had already saved enough for a year before leaving his job to start his construction services business.
Because he had 12 months' worth of overhead expenditures saved, he could concentrate solely on recruiting clients and expanding his firm. And, guess what? By month eight, he was already earning enough to support himself without touching half of that runway.
3. Start with a Side Hustle (But Know When to Switch)
While trying to balance a full-time job and a new business can be draining, there are smart ways to do it. Instead of trying to start your business full-time from the jump, you can begin as a "side hustle" but with a firm deadline. Set a specific date for when you will leave your full-time job, and use the side hustle phase to test your ideas, build initial clients, and gain some traction.
This is what I did back in 2006. Back then I started my construction services firm while still employed. I had spent the previous five years, testing ideas, improving my skills, and securing clients. But the key was that I knew when to make the switch. I didn’t wait until I was burnt out; instead, I had already planned my exit strategically, having a financial cushion helped and a major life event made way for me to leave my job and enter entrepreneurship full-time.
4. Trim Your Expenses Before You Make the Leap
Another smart move is to cut down on expenses before you go into business full-time. This can help extend your financial safety net. When I left my job in 2006, I decided to downsize my apartment, first I moved in with a friend, then back into the family residence and cut out unnecessary expenses like unused subscriptions, eating out, and shopping. These small changes made my monthly spending more manageable and helped me keep my runway longer, buying more time for my business to take off.
5. Set Milestones for Business Revenue
Setting milestones is another helpful tool for managing the uncertainty that comes before starting your business. When I worked on my business plan, my initial twelve-month goal was to replace 100% of my salary with the new business income. By breaking it down into smaller, manageable milestones, I could track my progress more easily and keep focused on what I needed to achieve in stages. It wasn’t all or nothing; it was about progress, not perfection.
If you’re wondering how to budget for this journey, I have a personal budgeting template you can use to help you figure it all out. You can download it here: [link].
Learn to Embrace the Long-Term
Building a business will take time, perhaps more than you expect. It's okay! The idea is to cherish the journey rather than rush through it. By establishing a solid financial safety net, you are giving yourself the most important gift of all: time. It's time to learn, grow, fail, modify, and achieve.
I understand that the thought of saving for a safety net might be scary, especially if you are ready to pursue your passion. However, by approaching the situation strategically, you increase your chances of success. It's like planting seeds and ensuring they get enough water and sunlight. You wouldn't want to speed the process; instead, you'd nourish those seeds until they grew robust. This is the same.
I also recommend you to read my earlier article, Budgeting Tips for Aspiring Entrepreneurs Leaving a Stable Salary, for more information on managing your funds before making the big leap. You can find it here.
Ready to Take Action?
Are you prepared to build a solid safety net and confidently venture into entrepreneurship? Remember, the goal is to stay on track and prevent the financial stress that comes with running out of money too soon.
To help you get started, I’ve got a free Simple Budget Planner that can help you build your financial safety net going into the new year. Download it for free here.
If you want more actionable insights like these, subscribe to The Entrepreneur Spark, which provides weekly information to help you succeed on your entrepreneurial journey. Visit www.smedigital.biz/blog and subscribe today!
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