How much savings should you have before you start a business? - Northern Michigan's News Leader

How much personal savings should you have before you start a business?

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You ultimately have to determine what your own comfort level is by analyzing your level of risk and the flexibility of your expenses. (©iStockphoto.com) You ultimately have to determine what your own comfort level is by analyzing your level of risk and the flexibility of your expenses. (©iStockphoto.com)
 

How much personal savings should you have before you start a business?

Conventional wisdom is that you should have up to 12 months worth of living expenses put away before you start your own business, although the figure depends on the type of business you're starting, your projected income, and your potential expenses. Service businesses, for example, often require less of an investment than retail or wholesale businesses.

It's unrealistic to think that you must have this amount of savings. Many successful businesses have been built on less. You ultimately have to determine what your own comfort level is by analyzing your level of risk and the flexibility of your expenses.

During your planning stages, you might want to sit down with an accountant who is familiar with small business issues as well as the issues in your industry. Ask this advisor how long they expect it will take you to generate income. This will help you come up with realistic projections, since your own projections may be overoptimistic.

You may need to think about alternative ways of earning money in the short term. Is there some kind of part-time work you can do such as consulting, bookkeeping or assistant work? Can you work a few days a week for a family member or associate? Think about how "creative" people like actors make ends meet -- they often take on these types of alternative jobs so they can continue to hone their craft, go on auditions, and pursue their true careers.

Take some time to determine your personal budget. How much do you need to live on? You might want to analyze your personal finances by looking at your various expenses, including (but not limited to) the following:

  • Groceries and food
  • Sundries
  • Car payments
  • Credit card payments
  • Other loan payments and debts
  • Entertainment
  • Home maintenance costs
  • Taxes
  • Insurance
  • Tuition/educational expenses
  • Savings/retirement plan/investments  

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