- Tap into your passion and skill sets to help define and drive your new business.
- Keep personal debt in check, and keep saving for your retirement.
- Stress test your idea before you start a full-time business.
- Weigh options carefully to finance your new business.
Starting a business can seem overwhelming. Generating a business idea is a great starting point, but an idea doesn't become a business without lots of effort. If you're willing to tap into your passion, it is important to be armed with the information necessary to turn your dream into a reality. Start the journey by following these 7 steps to turn your idea into a reality.
1. Get in financial shape
It can take 3 years or more to get a business rolling, even a home-based one. Create a budget and see where you can cut back on your expenses. A good place to start is paying down any credit card bills that have a balance while keeping a sharp eye on personal and business expenses.
"Debt can drag you down and limit your flexibility," says Brad Davis, CFP®, vice president of wealth management at Fidelity. "But when you're financially fit, keeping your spending in check and having a great credit score can help you smooth over cash flow challenges in the early days of starting your business, until you can afford to pay yourself a salary, which can sometimes be a year or more."
Another financial planning consideration: The cost of housing. You may need to downsize your home or move to a less-expensive place to live, says Davis. Refinancing a mortgage is another option, because your living costs are usually the biggest chunk of your monthly budget.
"Try to avoid multiple large cash outflows that happen all at once," adds Davis. "A young couple I worked with wanted to buy a new house and start a new business at the same time. Fortunately, they decided to wait to purchase a house. The delay in trading up paid off, because mortgage rates went down, and they refinanced just as their business began to take off."
Remember, while you no longer have an employer 401(k), you can—and should—still save for retirement, and sometimes, save even more. Admittedly, when you're running your own business, retirement savings is probably low on your list of priorities. But understanding your retirement plan options can help you continue to save for retirement and lower your taxes. In fact, you may even be able to eventually save more.
In fact, you may have more retirement savings opportunities by running your own business. A SEP IRA, SIMPLE IRA, or Solo 401(k) are all available to small business owners. These accounts may allow you to lower your taxes and save even more for retirement.
Additionally, you may wish to consider consolidating your previous employer's retirement plans into one of these options. Be sure to take into account any sources of money that may help you pay for living expenses while you grow your business.
2. Write a business plan
As you put together your business plan and begin looking for lenders to work with, the ability to sell your idea to others is key. A business plan is a written description of your business's future, a document that tells what you plan to do and how you plan to do it.
When writing your business plan, think strategically. Start with the present day, with a certain set of resources and abilities. You want to get to a point in the future (usually 3 to 5 years out), when your business will have a different set of resources and abilities, as well as increased assets. Your plan shows how you'll get from here to there. It's all about being able to articulate your value proposition, what would make your business successful, and analyzing existing competitors. Make sure you have answers to what sets you apart from similar companies.
3. Stress test your business idea
Before you leap from an existing good-paying job, stress test your idea with real customers. Find out what niche you're filling, understand the competition, and then find out where the real opportunity exists.
Davis recently worked with a client who launched a new venture in Texas. His advice: Do your homework, know your target audience, and start your venture as a side hustle. "They worked on business plan for 2-3 years while keeping their full time jobs. That time provided a window to get their financial house in order, test their business idea on some initial clients, then fine-tune their offering."
Tip: Use Google Trends to test your idea. Careful analysis of online trends can help you identify market needs and inspire ideas about how to make the best use of social media to market your company.
4. Find a mentor
Small business owners who receive 3 or more hours of mentoring report higher revenues and increased growth (vs other business owners who did not have mentors). One resource is the Service Corps of Retired Executives (SCORE), a non-profit organization with members who provide free consultation services to entrepreneurs. Members of SCORE are current or retired business owners and corporate executives who specialize in a variety of business skills. In addition to offering one-on-one mentoring, SCORE also holds seminars and workshops designed to help small businesses and entrepreneurs navigate the business world.
5. Be prepared
Running a business usually takes more than a humble passion for what you're doing. You may need to acquire new skills or certifications. Find out if there are any certifications or licenses needed for your business.
Do something every day to work toward your goal, even while you're still working at your regular job. That may mean spending some time online doing market research, or simply networking, but it helps crystallize your ideas.
6. Line up sources of funding
If you're in decent financial shape with no major debt, you'll likely have several options for funding your start-up. A good resource is the website for the US Small Business Administration, the federal agency that provides counseling, capital, and contracting expertise to small businesses and information on available funding programs. Other sources of funding could include personal savings, friends and family, banks and credit unions, angel investors, and crowdfunding websites such as Kickstarter or GoFundMe.
7. Put your professional team together
You can't do it alone. It's important to cultivate a network of supporters, professionals, partners, allies and vendors. If you believe in your business, others might too. Join networks such as your local chamber of commerce, social networks, and other relevant business groups. Realistically, you may need help with forming the business, payroll, billing, taxes, legal issues, marketing, real estate, etc. You can only be an expert in so many areas. By selecting partners with different expertise, you can broaden the scope of your business. This could expand your customer base, increase your earning potential, and give you time to grow your business.
As you plan to launch a new enterprise, consider working with a financial professional who can help keep your personal finances and retirement planning on track, allowing you to focus on growing and running your business.
Next steps to consider
Begin investing money to help fund your idea for a new business.
Compare retirement plans for freelancers and small-biz owners.
Untangle the complexity of self-employment.