Despite the many challenges brought on by COVID-19, Canadian entrepreneurship, business innovation and optimism have remained strong. Canadians are challenging themselves, seizing opportunities, and starting their own businesses. In our #GetStarted series, we provide practical tips, debunk common myths and call on experts to help prospective entrepreneurs take the leap from idea to action.
As you consider taking the leap to entrepreneurship, it’s important to know your numbers. Whether you have modest expectations or visions of big profits, having the financial side of your new venture sorted in advance will help give your business the chance it deserves.
To help you evaluate whether you’re in a good financial position to start your business, here are four questions to ask yourself.
1) How much do I need to start?
This is an important first question, and the answer will differ vastly depending on the type of business you’re starting.
So consider everything you might need to spend money on to get your business off the ground, such as the cost of a website, the rent on a retail location, insurance, staff, inventory, raw materials, permits, signage, etc. The list could be long or short – what’s most important is that you don’t miss something big that could derail your launch plans.
The RBC Start-Up Cost Calculator can help you identify the types of expenses you may encounter, and estimate the associated costs.
2) How much money can my business make?
Since you can’t pay yourself every penny earned by the business, it’s a good idea to do the math to know how much you need your business to make for you to leave the financial security you have today.
As you figure out how much you need to make from your business, keep in mind that you won’t be able to take home 100% of the revenue you bring in.
Shelagh Cummins, business coach and founder of The Road to Seven recommends a breakdown of 30/30/30/10. “The percentages will shift based on what you sell, but a good estimate to consider as you get started is that approximately 30 percent of your revenue will go to the government, 30 percent to salaries (for you and your team), 30 percent to operating costs and 10 percent profit margin,” she says.
3) Are my personal finances in order?
As Cummins says, “You may never work harder and earn less money than when you start a business.” So you want to feel confident that your personal finances offer enough of a safety net to sustain you during lean times.
Knowing how much you need on hand to cover your financial commitments without running your balances to zero or taking on debt will help you determine if you’re financially ready for full-time entrepreneurship. If you’re worrying about your personal financial security while trying to launch a business, you may not be able to give your new venture the attention it needs and deserves.
While you start up, your monthly revenue may be variable so it’s worth taking the time to gauge how you will sustain yourself in this phase. If you’re currently working full-time, ask yourself whether the money you make from your business has to fully replace the income you’re earning today. Or, can you get by with a certain percentage of that amount as you get started? Consider whether there are expenses you can cut down in other areas of your life to make a pay cut work, and/or if starting your business will naturally reduce existing costs. Or, starting a side hustle will take you through your launch phase.
4) Where will I get the money to fund my new business?
If you have a large stash of cash reserved for this moment, great! If not, you have some decisions to make as you figure out how you’ll fund your business. “If you’re going into something with upfront costs, you can go the friends and family route, but they might want to have a say in what you’re doing – and not everybody wants or needs that,” says Cummins. If you don’t have the capital right now, you may need to work your full-time gig a little longer or look into other ways to finance your new business.
So, can I afford this?
Once you’ve answered the above questions, how do things look? Are you financially ready to get started now? Or do you need a bit of time? If you don’t have everything in place today, see if you can map out a plan to be ready in a year or 18 months and then work toward that timeline.
It’s important to be patient so that you have the financial resources to start your business off on the right foot. Rushing in and funding your business on your credit card, for example, could end up having an impact on not only your finances but also your credit history and future opportunities for growth.
When you have every other aspect of your business lined up, it may feel difficult to wait until you have the money side of things worked out. But a solid financial foundation – which involves a detailed cost analysis, healthy personal finances and a thoughtful plan – will enable you to focus on building your best business.
RBC is here to help you move closer to business ownership with practical start-up steps.
- Download the Starting a Business Guide
- Contact an RBC Business Advisor who can also work with you to understand your vision and business goals, help you identify key considerations for your business plan, and set up the right financial solutions to help you get where you want to be.
- Futurpreneur is committed to helping young entrepreneurs start and grow their business, with start-up financing and mentoring.
- Ownr can help make your business official, with quick and simple business registration and incorporation services.
More from the #GetStarted Series:
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.