This is a common question that thousands of hopeful entrepreneurs have every day. You want to start a business. You are considering leaving your day job, but you just can’t pull the trigger, you just aren’t sure if you have enough saved up to make it work. You might consider a transition period where you keep your day job, or work part time, and start your business in your spare time. The key to understanding this question is a robust set of financial projections that provides a realistic outlook for your transition from day job to full time entrepreneur. Here are 3 key things you need to consider in order to understand if you have enough cash to start a business:
1. Only 16% of Entrepreneurs Take a Paycheck in Year 1 – Based on some in house data we gathered here at ProjectionHub, we found that only 16% of entrepreneurs were projecting to pay themselves during the first 12 months. The average owner’s draw for those 16% was as follows for the first 3 years:
Year 1 – $2,389 per month
Year 2 – $2,670 per month
Year 3 – $2,866 per month
So the first question is do your financial projections support you taking a salary from the business during the first year? If so, is $2,300 enough? Be sure that you are generating enough positive cash flow to pay yourself. If not, then you need to plan on keeping your day job.
2. How Long Will it Take to Receive Payment for Your First Sale – The next, really important question you need to answer is how long will it take you to get paid? It could take you months to close on your first sale, but once you get the sale you aren’t in the clear yet, it could take another 90 days to get paid for that sale. Startups don’t typically have a lot of leverage on their terms. If you sell to a large company, they may take advantage of the fact that you are relatively desperate for the sale, and may not pay for 2 or 3 months. This can be a death sentence for a startup. So what is the solution? Simply plan for it. Plan to not get paid for months, and stress test your startup. Can you survive if you don’t get paid for 90 days? If not, you may not be ready to make the jump into entrepreneurship.
3. You Can’t Get a Loan for 2 Years – Lastly, as a startup you probably won’t be able to get a loan for at least the first 2 years unless you have a great credit score and some personal assets. (You can check to see which lenders might lend to you at our partner Lendio). My point is that you can’t rely on getting a loan during the first two years for your financial projections to work. If you can’t survive at least two years without getting a loan for the business, then you simply aren’t ready to jump into a business full time yet.
If you are looking to start a business and leave your day job, take some time to create a set of financial projections for free on ProjectionHub, and if you have any questions about making the jump to full time entrepreneurship, please don’t hesitate to reach out to me at email@example.com.