Replacing Your Income

At some point in the life of anyone starting a new business comes the question, What am going to do for my income? Whether it is one of the first or last questions that you ask yourself it is an important question to consider. There are always going to be expenses that you have to pay, and money you will need to find for a range of different things.

So replacing you income can be quite a big part of starting a new business. Of course there is always the first option to have good savings before you begin, however for many this is not really part of the planning. The plan that is devised, has all the potential start up expenses for the business, and that is the target that they aim to have saved, or in some cases attempt to borrow. Quite quickly the realization, comes that there is no money to pay the bills and it becomes very quickly sink or struggle to stay above water.

WORK OUT YOUR EXPENSES

The first step in the process of covering your expenses is establishing exactly what they are. What bills do you have coming on a regular basis, weekly and monthly ones are the most important, as they are going to be the ones that show up the quickest. While yearly bills are still important, they may be a little further off, they still should be considered, especially ones you may be expecting in the first 6 months, of the business.

The best way to do this is to look back of the previous year, be it at your bank statement, or credit card bill, or at the actual bills you have received. Some of the most common ones to think about will include, rent, power, telephone, insurance, rates/land taxes, pay tv, ect.  The next step is to look at what you spend your money on each week, particularly important expenses here will include what you spend on food, clothing, petrol, and entertainment. While most of these are weekly expenses they can vary so getting an average of the last year will be a good start.

The final step is to work out what these all average out to over a weekly basis. For those expenses which are already weekly write them down. For the expenses which are monthly, multiple the monthly amount by 12, and then divide it by 52. This helps to work out the fact that some months have 4 week and others have 5. Then do the same for other bills, work out how much the bill costs over a year, and then divide by 52. Once you have these figures worked out you will have a total of what you need as income per week to cover your expenses.

LOOK AT YOUR INCOME SOURCES

For many people the income that they have is purely from working for a company, however many people also have income coming from other sources, as well. These sources can vary hugely in what they are, how much income they provide, how often that income comes in and at what rate that income is generated. Knowing what your sources are and the frequency will be a good start to knowing just how much of your expenses you can offset with income you already earn.

The most important part of knowing what your income sources are is knowing when you receive the income. It is no good relying on a once a year stream of income, to replace your weekly expenses if you are not going to see that income for another 6 months. So spending a little time looking at where you have some income coming from and working out how frequently, will help you to understand better where you may be able to gain some income to cover your expenses.  The sort of things you may like to look at could include, bank interest, share dividends, royalties, rental income (if you have investment properties), along with any other investment income streams, or part time employment income.

Just one thing to remember is not to confuse income streams with one off payments. Maybe you have done a few weeks contract work, which you won’t do again, while it is income, it is not income that will come in on a regular basis.

IS THERE A GAP

Once you have worked out all your expenses, and all the available income sources, you will be able to work out if you are going to have enough income to cover your expenses. If you have enough income then you are in a great position, as you are not going to be worried to greatly about not being able to pay a bill or such.

If on the other hand you are not earning enough to cover your expenses, you are in a little bit of a tricky spot. You really have a few options.

HOW QUICK CAN YOU COVER THE GAP

Covering the gap as quickly as possible is going to make it a little easier for you to focus on your business and not to be spending to much time trying to work around your personal finances. This could really in many cases mean the difference between success or failure in your business. If you are spending hours a week worrying about and trying to find the money to pay your bills this is going to take away from the time that you could be working on your business.

CONCLUSION

The more you know about your financial position, and how you are going to handle it in the early stages of your business, the better position you are going to be in. Spending a few days working it out now will solve you more then a few hours in the coming weeks and months when you are more focused on your business.

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