Starting a business is risky and challenging for your personal finances: the starting capital, initial operating costs, having the ability to back operations in case of lack of liquidity: everything falls on you, the entrepreneur. Not to mention that your personal income starts to depend on you and your company.
That’s why before deciding to launch a startup, you must make sure your personal finances are ready for entrepreneurship.
Define your starting capital
Calculating the initial costs of a company depend a lot on the industry you are going to approach and your business model. Your starting capital refer to all the money must pay to start your operations, and can be classified into:
Initial expenses (paid only once): registration, incorporation, permits, legal fees, etc.
Fixed expenses: cost of services, inventory, insurance, web domain, etc.
Variable expenses: depend on the operation; if your operation grows the variable expenses increase.
Deductibles: travel, office supplies, marketing, etc.
Capital expenses: refer to the single payment of property, vehicles, machinery, equipment or advance payments of deposits.
When defining your initial costs, calculate the amount needed to cover at least one year of operation. Having twelve months to focus on consolidating your company without worrying about your cash flow will increase your possibilities of a successful business.
Define your personal expenses
One of the biggest advantages, and disadvantages of being an entrepreneur is that you are responsible for your own income, and your salary depends entirely on the profitability of your company. That’s why, for the sake of your personal finances, at the time of defining the initial costs to start your business, you must also budget of your personal expenses.
The first operational year of a company is the most difficult, and as an entrepreneur you will have to face all the financial responsibilities of your company. In your personal financial planning consider an amount that covers all your personal expenses of at least six months, before beginning to receive a salary.
Check your credit profile
Starting a business requires different types of initial investment, and the reality is that few entrepreneurs can start without external capital.
Bank loans are a popular source of initial financing, but to qualify for them you should consider that all your credit history will come to light. Check your situation at the Credit Bureau and check your credit score.
Also, consider that banks are more likely to grant loans when there is fixed income, so quitting your job to start your business can make you an unappealing candidate for banks.
Consider your tax situation
Starting a business opens you to endless tax responsibilities, and changing from employee to owner tax wise is a big step. It’s important to know what federal, state and municipal taxes you should consider in your financial planning, as well as fiscal responsibilities that come with them.
In Mexico, the taxes that a company invariably pays at the federal level are: Income Tax, Value Added Tax and Corporate Tax at a Single Rate.
The fiscal responsibilities companies have are very different from the fiscal responsibilities of an employee; the monthly statements, the expeditions of invoices, and the financial control of a company are very different from the ones you are used to.
Before lounging into entrepreneurship educate yourself about the taxes and obligations that your new fiscal figure must fulfill as a company.
Starting a business is a great challenge both personally and financially, and it can improve the strength of your personal finances for good. So before leaving your job, make sure you can cover the basic financial risks. Before taking the big step towards entrepreneurship: analyze your personal finances, start from well-established business plan, and take it from there. And although there is never going to be a perfect time to start your business, do everything in your power to give your business the best opportunity to succeed.