Entrepreneurship

Can you afford to be your own boss?, By Michael Matty, CFA, CFP, Chief Investment Officer, St. Germain Investment Management Special to PRIME Thinking of starting your own business? For many people, it's the ultimate dream. But if you're not prepared for it, your ultimate dream can turn into the ultimate nightmare. Doing it by the numbers While there are many aspects to consider if you are a budding entrepreneur, the financial aspect looms large. Below are some important points to ponder: 1. Do you have sufficient savings for living expenses? While the thought of being your own boss may sound great, the trade-off is that there is no longer that reliable weekly paycheck. Are you psychologically ready to lose that safety net? And how will you feel as you watch your hard-earned savings account dwindle down to nothing, while at the same time you are working harder than you ever did before? The reality of most start-up businesses is that you will not be able to draw a paycheck for at least several months after start-up. Plan on having a minimum of six months living expenses saved up to draw on during the early stages of the business. Depending on the business you start, you may need significantly more. Note that this is in addition to the six months of emergency money that you should always keep in reserve to cover unplanned emergencies. 2. Do you have sufficient capital to start the business? An unsecured bank loan is unlikely. The most common source of business capital is your own pocket, or the pockets of your friends and family. Your retirement savings offers one potential place for you to tap into some substantial assets, but be aware that a failure of the business can also spell disaster for your retirement goals. Of course, businesses all have differing capital needs. A service business may require very low start-up capital. Because the business will have very little in assets, however, financing can be especially troublesome. A manufacturing business in need of equipment can require some significant initial cash outlays. But financing may be easier to obtain, because the loan can be (partially) secured by the equipment. 3. Where will your insurance coverage come from? While business insurance (to help protect you from lawsuits) may come to mind, the other big issue is health insurance. Since you likely are covered by your current employer, you will no longer be covered once you leave. And it's simply too risky to go without health insurance. So what are your choices? You can opt to continue for a limited period under your current employers policy (under COBRA laws), but this is typically a very expensive option. An individual policy can often be purchased through an affiliate group (for example, the National Association of the Self Employed). For many people, however, their best option is to pick up insurance through a working spouse. The cost is likely to be far lower than an individual policy. 4. Do you have a solid business plan in place? Just as your personal life needs a financial plan, so does your business. By having a plan in place you have a goal in mind, along with a plan to achieve it. This is helpful because it puts the daily distractions in perspective, helps you make better decisions, and gives you a ruler to measure success (or failure) by. Working on a good business plan may seem like a distraction to someone who is itching to 'get going', but it should serve to give a dose of reality to your dream. A business plan will outline the funding needed, the timing of funding, and the funding sources. It will discuss the market potential for the business, the feasibility of the location, and seasonal factors that might indicate a better time to start up. And if all this seems boring, the plan should also tell you when to expect the business to turn profitable, which in turn will tell you when you can begin to draw a paycheck! 5. Is a start-up right for you, or are you better with a franchise? While being a franchisee isn't exactly the same as being your own boss, for many people it is the best of both worlds. A franchise can still gives you a significant degree of freedom, while maintaining a safety net that can take care of administrative matters (bookkeeping systems, healthcare, marketing, etc.).exactly the stuff that most business owners would like to stay away from. While the initial start-up costs of a franchise may seem high, it is often because you may be underestimating the true costs of starting something on your own. If you can give up a little freedom (in exchange for reducing some of the hassles), a franchise may be for you. Are you ready to be the boss? The bottom line for budding entrepreneurs? Be ready for the unexpected, both positive and negative. If the business takes a little longer to turn cash flow positive than expected, have some back up funding in place. Conversely, the business may flourish, and your biggest worry may be how to grow it properly. Keep your business plan flexible, and update it as conditions change. And when you do start to make some money at the new venture, don't forget to start putting some aside for retirement! Column provided to PRIME by: St. Germain Investment management; 1500 Main Street, Springfield, MA. Phone is 413-733-5111 or 1-800-443-7624. web site: www.dgstgermain.com