If you’re entrepreneurial at heart, starting your own business may seem like a great idea. But before you make the leap and invest time and money into a new venture, it’s wise to consider all the financial implications.
Even a brilliant business idea can be risky financially, according to Al Nagy, a Certified Financial Planner® professional and a Senior Financial Consultant with IG Wealth Management in Edmonton. Al has advised many clients people who want to start a new business, invest in a franchise or take over their family business. He offers the following tips for prospective business owners.
1. Keep costs down
It’s best to keep your startup costs to a minimum and avoid taking on debt in the early stages of a new business, Al says. If you don’t need an office, for example, consider working out of your home,,and hold off on hiring employees until it’s necessary. If your early expenses are too high, it will make it difficult to survive your first few years; only 70% of new Canadian businesses are still open after their fifth year. Keeping fixed costs to a minimum early on is an important key to longevity.
2. Gauge the competition
Conduct a thorough review of the market sector in which you hope to launch your product or service. Is there a gap in the market, or are there other products or services similar to your concept? What are the barriers to entry? You could start with an online survey of potential buyers in the sector to gauge feedback. These baby steps will help you determine whether there is a market for your product or service and get early customer feedback to help you fine-tune your offering before investing more funds in the idea.
3. Secure funding
When it comes to the crucial startup funds, Al recommends financing your business with money you can afford to lose, rather than tapping into your RRSP savings and jeopardizing your retirement.
The portrait of entrepreneur-as-risk-taker may be romantic, but you should minimize that risk when it comes to finances wherever you can and ensure you’re planning for all eventualities.
Another source of funds may be discovered through grants and benefit programs through the federal and provincial governments. In some regions, for example, aspiring entrepreneurs can access programs that provide extended Employment Insurance benefits during the startup phase, as well as free business development training. Funding is also available through the Business Development Bank of Canada.
4. Be cautious with debt
Al cautions that it is important to learn the difference between good debt and bad debt when it comes to your business expenses. “Good debt is an investment in your financial future, extending your education, and doing other things which can increase your earning potential,” he says. “Bad debt is purchasing unaffordable items on credit with no realistic repayment plan for them.”
He stresses that there may be weeks, or even months where you can’t draw a salary, particularly when you first launch your business and are waiting for those first few payments or orders to come through.Having some personal savings set aside to get you through these periods is critical.
5. Assemble a team
Al encourages prospective entrepreneurs to assemble a team of professionals which could include a CFP® professional, a lawyer and an accountant, depending on the complexity of your business. As a business owner, you will be focused on operational issues and managing the firm day-to-day, so having these experts on call can help to set you up for success.
He also suggests that you approach your local chamber of commerce and consider the benefits of marketing your products/services through the organization’s channels; take advantage of any programs or seminars for new entrepreneurs; and attend networking events to receive advice from seasoned local business owners.
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