Why Starting a Business May Not Solve Your Financial Problems

You’re not thrilled with your 9-5 grind. Maybe you’re itching to make a bigger impact, love the idea of having control of your time or craving the potential to make lots of money. Sound about right?

Well, hold that thought.

It’s tempting to think that launching a business will set you on the path to financial freedom. After all, we’re bombarded with countless success stories of entrepreneurs who have made it big, and don’t get me started on the hordes of social media influencers who claim they make thousands a day right from the beach…

The reality is that starting a business is no guarantee for financial success. Did you know that 23.2% of new businesses fail within their first year, and nearly 50% do not survive past the fifth year, according to the Bureau of Labor Statistics?¹ I know the allure of starting your own business and escaping the 9-5 grind can be strong, but it’s important to know that owning a business is not a guaranteed path to the financial freedom you may be looking for. The truth is, a lot of businesses have a hard time making a significant profit, and some even go under completely, leaving their owners worse off than when they started. Even though many of these success stories are true, unfortunately, they aren’t the norm (or always real).

So, before you consider taking the plunge into entrepreneurship, I want to get past the “get rich quick” message that is so pervasive online and talk about some of the realities of starting your own business so you start for the right reasons.

Related: A Lot of People Want to Start a Business, But Don’t. Why?

It’s Common To Underestimate Expenses and Overestimate Revenue

It’s easy to get caught up in the excitement of starting a new business, and many new business owners will fall into the trap of making overly optimistic sales forecasts based on limited market research or unrealistic assumptions about customer demand. In many cases, they also overlook or underestimate several expenses, like customer acquisition, marketing, and legal costs.

The Small Business Administration (SBA) says that it might take new businesses several years before they start making a profit, and they often lose money in the first few months or even years. This is why understanding your numbers is an important part of starting a business.

In my experience working with small business owners on several hundred sets of financial projections, I can only remember one who managed to get their projections and year-end numbers close. And this was a business that had been in operation for a while and the owner really understood his finances. For startups, creating accurate projections is even more challenging than an existing business (dare I say impossible) because there are so many things that someone starting a business isn’t going to know, and there are so many unknown factors that will impact profitability. I mention this not to discourage you from creating projections but to recommend running scenarios where sales are lower, and expenses are higher than your best guess. This way, you can budget for having some extra cash available to sustain your business for an extended period.

Another way to address this problem is to consider keeping your day job a while longer. This will provide the opportunity to build your savings and reduce the financial pressure on your new business. Also, if you can begin working on your business part-time, you are making mistakes on a much smaller scale and gain a better understanding of the finances of the business. As your business grows and generates revenue, you will know whether it can support paying you a full-time income. It also gives a lower-risk way to see if being a full-time business owner is what you want (Being a business owner has a lot of upsides, but it isn’t for everyone).

Related: Steps to Starting a Side Hustle While Working a Full-Time Job

Another tip I want to give you is to take your financial projections to an accountant or a business mentor. They can provide valuable feedback on your projections and identify areas where you may be underestimating costs or overestimating revenue. Their expertise and objective perspective can help you refine your projections and make more realistic assumptions about your business’s financial future.

Starting a Business Can Be Expensive

Despite the clickbaity articles and videos showing how to start a business with no money (I have yet to see someone actually do this, by the way), it’s important to understand that launching a business requires some upfront investment for expenses like equipment, inventory, marketing, and operational costs. Without enough startup cash or access to funding, your business may be set up to fail from the very beginning, even if you have a brilliant idea or a strong passion for what you do. And no, there usually aren’t grants to help people start a business.

Related: Free Money For Small Business: Grant Myth vs. Reality

To better estimate your startup costs, I strongly recommend writing a business plan. Many people only write one when a lender or investor asks for it, but that’s a mistake. A business plan is still super valuable, even if you’re not looking for outside funding.

So, what goes into a business plan? It’s essentially a roadmap that gets all of the ideas out of your head and helps you translate those ideas into concrete actions. Your business plan guides you through each stage of developing your business, and one of those stages is identifying all the expenses you’ll have to start the business. By itemizing your startup costs, you can more accurately determine how much money you’ll need to get your business up and running and where that money will come from.

Starting a business can be expensive, but another reason to consider keeping your day job for a while longer is that you have more time to stabilize your financial situation. If you have them, you can focus on paying off high-interest debts, build an emergency fund, and create a budget to manage your personal expenses better. To reduce financial stress if your business doesn’t go exactly as planned (which rarely happens), I suggest having at least 6-12 months of living and business expenses built up.

Related: 3 Ways to Overcome the Fear of Starting a Business

Businesses Have Inconsistent Cash Flow

Inconsistent cash flow is another major challenge for many businesses (not just startups), and it is even more risky if you’re already facing personal financial difficulties. Unlike a regular job that pays a predictable salary, a new business often experiences fluctuating income and surprise expenses. This unpredictability can make it tough to handle personal finances and keep up with bills. Even if you have an excellent business idea, it can take longer than you expect for potential customers to find you, and some businesses even have a delay between doing the work and getting paid for it.

One factor that is often overlooked when starting a business is seasonality. Many businesses experience fluctuations in demand depending on the time of year, which can lead to periods of high income followed by periods of little or no revenue. For example, a landscaping business may be booming during the spring and summer months when people focus on maintaining their yards and gardens. However, during the winter months, demand for landscaping services may drop significantly, leaving the business owner struggling to cover expenses and pay bills unless they plan ahead.

Seasonality can also be particularly challenging for new businesses that haven’t yet established a strong financial foundation because, during the slow season, you will still have business expenses to pay, like rent, utilities, loans, and other fixed costs, even if you’re not bringing in much revenue. This can quickly drain your cash reserves and put your business at risk of failure.

Many Business Owners Aren’t “Numbers People”

The last thing that I’ll cover is that running a successful business requires a diverse skill set, including financial management, marketing, and operations. If managing your personal finances is already a challenge, running a business is probably going to be even more difficult due to the increased complexity and number of expenses to manage.

Think about it: if you struggle to keep track of your personal budget, pay bills on time, or save for the future, how will you handle the added responsibilities of managing business finances? You’ll need to stay on top of invoicing, accounts payable, taxes, payroll, and countless other financial tasks, all while trying to grow your business and attract customers to succeed.

Even small mistakes, like forgetting to pay a vendor or collecting money due from clients, can lead to big problems. You might miss out on early payment discounts, incur late fees, or even not get paid for your work. These mistakes can be costly in terms of both money and time, distracting you from the core activities that drive your business forward.

That’s why it’s so important to be honest with yourself about your financial management skills before starting a business. If you know that managing money is a weakness, take proactive steps to either improve your skills or find help.

Regardless of whether you are great at taking care of your personal finances or not, I can’t tell you how many times I’ve worked with business owners who do their own bookkeeping because they thought they couldn’t afford to hire a professional. Instead, the owner or their spouse (neither of whom typically had a background in accounting) spends a lot of time learning and struggling with this task – all while hoping they are doing it right. My advice here is that it’s important to consider the value of your time as a limited resource. You only have so many productive hours in a day. Why waste them doing tasks that you aren’t qualified (or enjoy) doing? Not only does this take away from the time you could be spending on revenue-generating activities, but it also increases the likelihood of costly errors. Hiring a bookkeeper or CPA, despite the cost (which in reality isn’t usually a lot), will free up your time to focus on growing your business and improving profitability. Also, if your business is going to operate on such a tight margin that you cannot afford essential services like professional accounting, it might be a sign to reassess the feasibility of your business model.

Wrapping Up

In the end, starting your own business isn’t something to rush into, especially if you’re hoping it will solve your financial problems. To do it right, it takes a careful planning, a good deal of preparation, and plenty of hard work, and even then, there’s no guarantee of success. But by facing some of the challenges of starting a business before launching, you can give yourself a much better shot at making your entrepreneurial dreams a reality – and maybe make a lot of money doing it.

Sources

1. https://www.bls.gov/bdm/us_age_naics_00_table7.txt ︎