After working for someone else, self-employment can be an exhilarating change. But it’s also fraught with potential pitfalls, including the possibility of running out of money before your new venture even gets off the ground.
“The more planning you can do beforehand, the more you’ll increase your chances of growth and success,” says Raj Tumber, a Las Vegas–based small-business advisor with SCORE, a nonprofit organization that provides guidance to entrepreneurs.
Tumber, who has plenty of experience watching business owners meet the challenges of getting a venture started, offers four steps all entrepreneurs should consider to help prepare financially for self-employment:
1. Create a thorough business plan. Perhaps you’ve figured out where you add value in your core profession for a specific clientele, and you’re ready to begin offering that service. Before you start seeing clients, write out a detailed business plan. That way you can get a firm handle on startup expenses such as legal fees and a marketing budget, as well as ongoing costs such as office space and supplies.
2. Budget your transition. Even if your business reaches all your revenue targets during its first year, you’ll probably still see a drop in your income as you work toward generating a consistent profit and reinvest in your new venture. Tumber suggests saving consistently for one year before leaving your full-time job to build a cash buffer that can help sustain your household through the transition. To prepare, ask your Financial Advisor to help you anticipate costs and map out strategies for potentially boosting your savings and building that financial cushion. In particular, make sure you budget for:
3. Make your office space work for you. If you plan to work from a home office when you launch your business, you might qualify for a tax deduction. To apply for that claim, your residence’s work area must be either the principal place of business or a space to meet with clients, patients or customers. You might also qualify if you use a detached structure that is part of your home, such as a garage or studio, in connection with your line of work. IRS guidelines for claiming a tax deduction on your office space can be found at http://www.irs.gov.
4. Line up credit early. It’s always smart to line up access to credit before you need it, and that’s especially true when you’re considering a switch to self-employment. Qualifying for a loan is likely to be much smoother while you still have a stable income. Otherwise, you are likely to face stricter underwriting standards as a self-employed borrower. “As a businessperson, you will probably need to show your last couple years of profit-and-loss statements, which isn’t possible for a brand-new business,” Tumber says.
1 Internal Revenue Service, “Estimated Taxes,” http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes.
Wells Fargo Advisors does not provide legal or tax advice.
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