Most execepreneurs often jump straight to considering the financial investment required to make the leap without properly considering the personal aspects of it. That’s why we spent time on the mental aspects first.
Of course, it’s hardly surprising that we spend a lot of time on the financial side. Cash flow is a fickle thing for small businesses, so you want to make sure that you’re prepared to get through the first few years intact. This is especially the case if, like many of us, you want to do your best to insulate your family from the volatility of a new venture. As Mike Tayter said in Episode 1, you don’t want the cash flow to make the decisions for you.
Your “number” is the amount you need to bank before you feel comfortable leaving your corporate role. It’s based largely on your lifestyle expenses and the cost of starting and initially running your business, plus a couple of variables unique to your situation. While everyone’s number is different, the key components are largely the same.
Let’s go through the step-by-step considerations I made when putting together my own plan.
Before you get going, I suggest that you consider three key issues: your lifestyle, your runway, and your buffer.
First, how willing are you to sacrifice lifestyle? I know that a lot of execepreneurs, myself included, didn’t want their families to experience too radical a lifestyle shift during the transition. It was also very difficult to determine where to cut. We had quite a bit of fixed costs that would take a lot of work to change (mortgage, childcare, etc.). You need to think about where and how much you are willing to cut and use that in your calculations.
The second factor is the amount of time you want to give yourself to “make it.” I wanted to have our life fully funded for at least two years, and a lot of my peers put a similar timespan on their own ventures. Realistically speaking, I believe that real breakthroughs need more time to take hold — on the order of three to five years — but saving that amount of money can be daunting for most people.
Finally, you want to incorporate buffer in case you burn through your start-up capital quicker than expected, or you have an unforeseen family expense. Much like a home renovation, financing a business (not to mention a family life) can cost more than you expect. Build an error term into your math to account for this.
These three factors work alongside and against each other. If you’re willing to downgrade your lifestyle, you might be able to give yourself more time to get your business off the ground. If you want to avoid the risk of taking several months to find a job down the road, you might want to build in a bigger margin of error.
These aren’t easy questions to answer. It’s difficult to balance realism with the optimism you have as an entrepreneur, which is exactly what makes this exercise so meaningful.
For us, the move from hedge fund life to launching a business in 2012 actually coincided with a rise in our monthly expenses. Although we cut our housing expenses in half by moving from Fairfield County, Connecticut to Michigan, our kids were getting older, which resulted in a significant increase in our childcare costs.
On the other hand, I had more leeway with my number when I started because we were a professional services firm and had immediate revenue. With a consulting company, you can probably get away with twelve months in the bank; for a product-based company that won’t allow you to pull out money for quite some time, I believe anything less than 24 months would be a recipe for ongoing stress.
If you have a kids , a mortgage, and the expectation of traveling or enjoying a few material luxuries, your expenses can easily run well over $10,000 per month. Whether or not you’re open to changing your lifestyle, you’ll want to do an analysis of what you’ll realistically need on a monthly basis in order to help arrive at your number. Of course, a working spouse or other sources of income will also factor into the equation.
Critically, you need to remember that certain corporate perks — like free or lower-cost health insurance for your kids — might no longer be part of the picture.
Here are the categories we budgeted for on a monthly basis:
- Housing (including mortgage, taxes, utilities, and home improvements)
- Auto (car payments, fuel, repairs)
- Insurance (car insurance, health insurance, life insurance, etc.)
- Childcare (nanny, daycare, preschool, extracurricular classes)
- Groceries and mundane day-to-day expenses
- Shopping (clothes, household goods)
- Debt (student loans)
- Other miscellaneous expenses (medical co-pays, gifts, etc.)
We also included annualized expenses, namely charitable giving and travel. Your own categories might differ, but this is a good place to start. Padding is important here as well – whether it be a roof that needs replacing or emergency travel.
Your business expenses will depend largely on the type of business you’re starting and your strategy. I’m in professional services, so relatively speaking I didn’t need much: I budgeted $50,000 and I didn’t use all of it, as I started out with contractors. Once the business got going, the profits funded the additional growth.
Below are some categories you might want to think through for your own business. I’ve included a few of our numbers for you as a reference point. The two places we did spend more than I had anticipated was for insurance and legal fees. Given our growth has primarily come through technology services, having strong coverage there was important. In addition, we have a number of contractors and partners, and each contract is a little different. Hiring a good attorney costs more but is definitely worth it – they point out things others don’t see.
As with anything, the relevance of any given category (or the comprehensiveness of this list) will vary depending on the type of business you’re in. For a lot of people, budgeting for big costs is obvious, but the small ones are often easy to forget about and add up quickly.
One-time basic costs:
- Building improvements (when we moved into our space, we had it carpeted, painted, secured with new locks, etc.)
- FFE (the old standby from Accounting 101: furniture, fixtures, and equipment. We put in new kitchen appliances, desks, and so on)
- Deposit for lease
- Start-up legal costs (state licenses, employee agreements, contractor agreements, etc.)
- Professional services (market research, strategic consulting, etc.)
- Technology (computers, software, website, etc.)
- Working capital to cover the first few months of operations (see below)
Initial product/service development costs:
- Research and development
- Product design
- Sampling and initial inventory
- Service agreements and related contracts
- Production equipment or supplies
- Permits or licenses (if you’re building a software service, for example, you’ll need developer licenses)
Your monthly expenses might include:
- Operational costs
- Rent/lease (ours runs about $15,000 per year in Michigan for 1000 sqft, given most everyone is virtual)
- Utilities (we pay about $2,500 per year)
- Web presence (hosting, domains, email, design and development)
- Accounting and bookkeeping
- Office supplies (paper, ink, and other random things that add up)
- Product costs
- Any ongoing product development costs (refining your information product, developing new versions of your software service, etc.)
- Support services (customer service, technical support)
- Human capital costs
- Employee salaries and contractor payments
- Learning and development (subscriptions, conferences, company retreats or trainings, etc.)
- Risk management costs
- Business insurance (we pay about $4,000 per year for a $2M+ revenue business)
- Health insurance
- Key man insurance (if your business is completely or almost completely reliant on you, you may want to consider this kind of policy, which offsets the costs that would arise from an untimely death or disability)
- Marketing and business development costs
- General marketing and sales (can include anything from social media marketing to copywriting to a full-on agency campaign)
- Entertainment (if applicable)
- Business travel (to meet potential clients, partners, suppliers, etc.)
We would love to hear your number or about the expenses you’ve included that we didn’t think about in the comments below!
Running the numbers
Let’s be clear: deciding how and when to leave your corporate life and start on your own is a lot deeper than a simple math problem. If you’ve recently had a child — or have three under five like we did when I started my company — you’re probably facing a lot of other preferences, obstacles, and needs. You probably also have time constraints, soccer drop-off responsibilities, and lifestyle decisions to think about.
Take the time to think through if you’re mentally ready for the journey, as well as financially. Coming up in July, we’ll talk about whether you have a good idea, and if that idea is a fit for who you are.