Successful Solo Business Begins With Careful Financial Planning
A successful one-person business must produce enough income for the owner to survive and thrive. But success may depend in part on the owner’s personal financial security.
That’s why a solo business owner needs a financial plan long before developing a business plan. It’s the personal and family financial plan that helps ensure the future of the business.
Apple Inc. has $80 billion in cash and short-term investments along with easy access to short-term bank loans, according to its recent financial statements. A one-person business usually isn’t able to tap a huge amount of extra cash in an emergency or downturn without proper financial planning.
The U.S. Small Business Administration says:
More than 20 percent of small businesses fail within one year.
Only 50 percent survive at least five years.
About 33 percent survive at least 10 years.
Lack of funding
The most quoted reason for the failures is a lack of funding. For a solo business, lack of funding is another way of saying the owner:
Doesn’t have enough sources of other income to cover a shortfall in business revenue.
Has excessive personal expenses.
Can’t get enough short-term financial help from other sources such as banks.
A financial plan with a business in mind will help address the first two reasons above and in some cases even the third one. I learned this important lesson when I began my own financial planning years before I started my successful solo business in publishing and consulting. It took years to make the transition in attitude and reality.
I realized the necessity of it even more after consulting dozens of companies and non-profit associations. They often overestimated their revenue, underestimated their expenses and struggled with extra funding to make up the difference.
Although my plan had many common elements of a financial plan, it also had some guidelines that I developed specifically with my upcoming one-person business in mind. Most importantly, I focused on developing multiple streams of income and squeezing every wasteful penny from both our family’s expenses and my business expenses.
Find Multiple Streams of Income
Invest for income
A solo business owner dramatically increases his or her chances for survival with a hefty savings account. Just as importantly, the account becomes another tool for financial security if the owner invests the money for income.
A portfolio with a focus on income investing can easily have a yield of 3 to 5 percent or even higher. A $100,000 portfolio in that case can generate $300 to $400 a month, which is enough if necessary to pay for a monthly grocery bill during a business downturn and depending on the size of the family.
Some one-person business owners don’t have a $100,000 portfolio at startup (although others have far more). But the point remains about the benefit of aggressive savings and investing for income before launch. The greater the savings and investment income, the greater the financial security.
Identify flexible employment
Employment websites and sources of employment ads have many jobs that are flexible, contract or part-time. They serve as extra sources of income if the business doesn’t generate enough of it during the first year or two in operation.
A lone entrepreneur of course needs to consider how to make these jobs fit into an existing schedule without conflicts with existing work and clients. But it helps to think about those jobs simply as other clients who get the same respect, professionalism and quality of work.
Develop related business opportunities
A successful solo business owner works long hours and wastes no time. When there is some free time, the owner can try to develop other sources of income that are flexible and loosely related to the existing business.
Writing and consulting are two of the most common income-producing activities that solo business owners do in their free time. They write for websites or product ebooks and print books that promote their business and enhance their reputation. They also find other businesses that need their professional expertise.
Consider a supportive spouse or partner
Anyone with a spouse or life partner will find it much easier to launch and succeed with a solo business than without one.
The financial plan should consider his or her own income and expenses, how much they are willing to make certain sacrifices and how long they are willing to wait for life to return to normal.
Putting an agreement in writing with a timetable ensures that both parties have made a solid commitment they can review on a regular basis. Starting a business often has a major impact on spouses, partners and families. A thoughtful plan may ease the burden.
Save and invest business profits
If the business has a good year, a careful owner will save and invest the profits in a business account rather than take the money and spend it.
If the business account is invested for income, it produces yet another source of revenue for the business and increase its financial security. If the business has a down year, the owner can take out that money to cover certain necessary expenses such as wages and benefits.
Obsess Over Expenses
Automatically assume a home office
Launching the firm with a home office is an immediate financial advantage. Some businesses need an outside office but many do not. Others rent an office when a home office would suffice.
The majority of solo businesses can and should begin with a home office. The important question is, do I absolutely need an outside office to succeed? It’s far better financially and psychologically to start with a home office and migrate to a leased office when the business grows enough than the other way around.
In the meantime, the local library or any other public space with free wi-fi works well as an office.
Recognize unexpected savings
The corporate job is 15 miles away downtown. That’s 30 miles a day round trip to work, 150 a week or 7,200 a year assuming four weeks of vacation, holidays and days off. At 50 cents a mile, the gas plus wear and tear on a car is $3,600 a year. Add the possibility of parking fees, lunches and other related expenses.
Those expenses vanish with a home-based business. Did the business owner ever buy lunch, dinner or go out for drinks after work? Those expenses usually vanish as well. Sometimes launching a solo business actually saves money. A financial plan should identify those opportunities for a realistic picture of what to expect.
Turn personal expenses into tax deductions
Tread carefully here. Tax avoidance is good; tax evasion is bad. Driving a car to meet a client is a tax deductible expense. So are home offices, company contributions to retirement plans, part of trips that combine business and pleasure as well as other activities that fall right on that fine line between business and personal expenses. Just make sure everything is documented and provable.
Wipe out personal debt
A successful solo business owner should almost never have credit card debt that carries over to the next month at the start of the business. So make all efforts to wipe it out before launch and keep it that way.
Avoid buying any new cars within a few years of launch. Even better, eliminate all car loans as well. A business owner who drives a 10-year-old car with no payments and 150,000 miles on it has far fewer worries than someone driving a leased BMW.
If possible, eliminate or reduce the big one: mortgage debt. Like the savings example above, this too is a matter of long-term financial planning and even age. Someone who launches a business later in life has more time to build up savings and reduce debt.
After 12 years in business on my own, I found that all of the above steps plus more made a big difference in building financial security and success for my one-person business.
Although many “experts” say that a business plan comes first, in reality it’s the financial plan that should come first. A business plan of course is necessary, but a solo owner who gets prepared financially and follows solid money practices will increase the odds of success and reduce the odds of failure.
“Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline.” - Thomas J. Stanley, “The Millionaire Next Door”
© 2019 Scott S Bateman