QutDayJobI am approaching the 30th anniversary of when I started to work as a consultant in my home. Over the years, I have often been asked by envious rat-race-runners how to break free of the grind and work from home.

I have a series of posts in this blog to guide people in starting their own solo businesses, keeping in mind that I’m basing all of this on my own experience and common sense. (Yes, I have a degree in business management, but having a degree doesn’t make a person an expert.)

An important part of preparing to escape from your day job and striking out on your own is making sure you have the money figured out. Here are some of the basics, assuming that you do not plan to get outside financing, to figure out your “escape number” in 7 steps.

Caveat: I think I give good advice, but please consult your partner or accountant or lawyer or tarot cards or Facebook friends or whatever you need to do before actually quitting your day job, okay? Your mileage may vary, and you’re responsible for your own decisions.

1-2: Your startup costs

Figure out what you will need to get started by adding together all your initial needs:

  1. Business startup costs: Determine what you need to spend to get your basic business started. You might already have some of this in place, but here’s a list to get you started: state and local business license, web domain registration, web hosting, (optional) a consultant to get your website set up, (optional) a designer to help with a logo and other design, printing business cards and other collateral, first month and deposit on an office (unless you are going to work from home), a printer or other needed equipment, and so on.
  2. Initial marketing: Determine what your initial marketing efforts may cost. Some entrepreneurs may not have any additional costs, but others may need to purchase inventory, register to be included in directories, run ads, attend networking events, or more.

Add the total amounts of (1) your basic business startup costs and (2) your initial marketing efforts together, then multiple the sum by 1.10 to arrive at the startup costs that you will need in order to launch.  (That extra 10% is a buffer to cover the inevitable last-minute or overlooked expense.)

3-5: Minimum monthly sales goal

I’ve written this assuming you are starting a sole proprietorship. If you have partners, then be sure to include the salary needs for all your partners under “Personal budget” below.

  1. Personal budget: Look at your personal budget to determine how much money you need each month in order to get by. Add in enough profit to be worthwhile. This includes housing, clothing, food, utilities and any other regular bills, savings (never neglect your savings!), entertainment, and so on. Express this as a monthly amount.
  2. Ongoing business expenses: Look at all your business expenses to determine how much money you need each month in order to keep your business running with enough to grow. This includes your costs to get the products you sell, run meetings, rent an office, work with vendors, host your website and cloud services, bring on new clients, maintain your computer, and so on. Express this as a monthly amount.
  3. Monthly sales goal: Add the monthly amounts of (3) your personal budget and (4) ongoing business expenses together, and then multiply the sum by 1.25 to arrive at the minimum amount that you must bring in each month. This is your starting monthly sales goal. (That extra 25% is to pay taxes – put it in the bank and forget it exists until it’s time to pay your quarterly taxes! If you are outside the US, then your multiplier here may be different.)

Note that this is just your monthly sales goal to start. Once you are on your feet and your business is running smoothly, you will need to increase this to fund your business’ growth.

6-7: Savings to get you started

Unless you have a partner bringing in an income or a family fortune to draw on, many entrepreneurs must rely on their savings to make ends meet while they launch. You hear stories all the time about people living on their credit cards as they start their business, but I strongly urge you not to do this as it will place you in a credit trap that can easily spiral out of control.

  1. Duration: Determine how many months you think it will take for you to reliably reach your monthly sales goal.
  2. Buffer in savings: Multiply the (6) duration number by (5) your monthly sales goal to arrive at the amount that you should have in savings before you launch.

Of course this is a general guideline – the amount of buffer you give yourself depends on many factors. See re: the caveat near the top of this post!

Of course, you need to have a business plan before you cut that purse string, too. See my post The Entrepreneur’s 10-Step Condensed Business Plan.

Moral of the story

Sometimes it’s hard to launch a business while holding on to the day job. Save yourself from a constant state of anxiety by putting plenty of planning into your new business before you launch. Either hold onto that day job until you’re ready to take the wheel on your own, or make sure you have enough buffer in your savings account.

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