Use Budgets to Verify That You and Your Startup Are Ready Before You Quit Your 9-to-5 job
Thinking of leaving your 9-to-5 job to pursue your dream? Hold on a second. I’d suggest thinking through the decision before you march into your boss’s office and announce those two words you’ve been waiting so long to yell out: I quit!
I was once like you: Working my day job and dreaming of setting off on my own, to fulfill my ambitions and create business success for myself. Eventually, I did, and I was successful at it. Today I run a fast-growing managed tech-services company called My Blue Umbrella that has more than 30 employees and logs more than $10 million in annual revenues. By anyone’s definition, I am living my dream.
So you may be surprised to hear what I’m about to say: Don’t jump. Not yet. Wait until you’re absolutely certain the step you’re about to take is the right one.
Success doesn’t come easy. The business climate could look one way, and your business idea may seem guaranteed for success—and then things shift, market preferences change and all the businesses in the one you’re about to join are heading down the tubes.
Business can be fickle.
So it’s useful to have a checklist to go through before you start burning the bridges that lead back to your 9-to-5 job.
In fact, it took me years to give up my regular paycheque. Thinking back to my 20s, I had my company name picked out, an office leased, and the ink dry on three contracts from three different clients—and I still didn’t leave. I had the logo designed and the website made, and two employees working for me full-time—and still I didn’t leave.
Every weekday morning, I still went in to my day job. Because I had a daughter to support, and a mortgage and car payments, and I was scared to death what might happen if my business failed.
So when do you know you’re ready to go out on your own? Before you go, I would suggest going through the following steps.
Figure out how much you cost
Put another way, determine what your personal carrying cost is. What’s your burn rate? Take into account the big things, like rent or mortgage, car payments, school loans, daycare or babysitting costs, utilities, property taxes, internet and cellphone and everything else. Then start tracking your spending on the stuff you don’t think about. How much did you spend at the bar on Thursday night? Don’t forget to include the cost of the poutine that you bought after close. What about your dog’s veterinary fees? Once you have a monthly number, set it aside and track your spending for awhile. Then go back to that spreadsheet on your computer and fill everything in. Your budget should be accurate, and most budgets only get accurate if they’re revised two or three times. Everyone always forgets something.
Don’t forget the taxman
Now that you have your budget, and it’s accurate, start building in some padding. Add 5% of your monthly total for a rainy day. Not as savings, per se, to accrue over time, but for the intangibles, which will hit you when you least expect. Your dog gets sick and you need to go to the vet. Or you get nailed for texting and driving and have to pay a $600 fine. Or what if your fridge breaks? Next: Taxes. As an employee, your taxes were taken off your paycheque in advance. But when you’re off on your own, as a sole proprietor, you have to pay taxes in a discretionary manner. That means, you have to pay CRA out of your income. How do you know you’ll have the money? Be prepared to set aside 30% of what you take in to pay the taxman. That means you need to be taking in your carrying costs, plus 43% more than your carrying costs to pay for income tax, to ensure that you have enough money to pay for everything. Think about it this way: Say you take in $100,000 as the sole proprietor for your new business. A nice even $30,000 is what you should be setting aside, for tax, leaving you with $70,000 to pay for everything else—including your sick dog. (And note that $100,000 is $70,000 plus 43% of $70,000.)
The intangibles
CEO Brian Chesky’s company, Airbnb, was recently valued at $35 billion US. Yet in 2008 he was funding his company with credit cards. In fact, he recalled that had so many credit cards that he stored them the way kids store their baseball cards, in little plastic binder sleeves. DO NOT DO THIS. Chesky was the exception to the rule, with an idea so good and so timely that it succeeded despite investors not believing in it at first. If you’re going to be successful, it should be pretty easy to find investors who will believe in you. If you have to go it alone for long enough that you must resort to funding your idea with high-interest credit, then your idea likely isn’t good enough—or you don’t have the required experience. Instead, keep only one credit card, and fund your start-up’s operations with the income you make from your dayjob.
There is nothing like running your own business. It is gut-churningly scary—and the greatest job in the world. So when does it make sense to quit your 9-to-5 and jump full-time into working for your start-up as your own boss? When a certain number of conditions are met. First, ensure that the start-up is netting enough money to support your personal carrying costs, including your income tax. Then consider whether it makes sense to become your start-up’s employee number one—or whether you should just hire someone. Are you certain the business is viable over the long term? Does the start-up absolutely need you, or can you keep working at your cushy dayjob and running things on the side while someone else manages things day-to-day? Consider the answers to these, and other questions, as you deliberate whether to make what could become the most important career move you’ll ever make.
