Tips for a Successful Business Succession Plan
In the early stages of starting a company, personal finances and business success are often closely intertwined. Founders and entrepreneurs need to ensure they have sufficient funds to support themselves before their company starts generating revenue. Without adequate financial preparation, they might find themselves splitting time between building their business and sourcing capital.
Managing personal finances while building a company can be daunting, but founders can take proactive steps to prepare. Here’s a step-by-step startup financial planning guide for founders embarking on their entrepreneurial journey:
1. Evaluate Current Finances and Financial Plans
Before making a full-time commitment to their business idea, entrepreneurs should thoroughly review their current finances.
Examine Expenses: Since founders' income can fluctuate, it’s wise to consider reducing monthly spending in case of unexpected income dips. Track discretionary expenses like dining out and entertainment to identify areas where spending can be cut if needed.
Assess Debts: Founders should create a financial plan to address their debts if they leave their primary job to commit full-time to their startup. An updated, conservative budget should anticipate potentially reduced or inconsistent income during the early stages.
Build an Emergency Fund: Establish a cash reserve for unexpected expenses, such as car repairs or medical bills. The longer founders can defer their own compensation, the more resources they can allocate to their business.
2. Invest Personal Funds into Your Startup
Many founders rely on various funding sources to develop early prototypes, including personal savings, money from friends and family, or grants. Early funding helps gain traction before approaching investors. A founder’s willingness to invest their own money can signal commitment and passion to potential investors.
However, entrepreneurs should be strategic about how they use their personal funds. Drawing from retirement accounts can trigger early-withdrawal penalties and reduce compound growth, while high-interest credit card debt can increase capital costs and reduce profitability.
3. Develop a Prototype While Still Employed
Maintaining a regular paycheck provides security, which is why many founders keep their primary income source while developing their business idea. This approach allows them to refine their concept and create a prototype or pitch deck before transitioning to full-time entrepreneurship.
Founders should take time to understand the problem they want to solve, the total addressable market, and how to attract potential customers. A steady job can provide financial stability while they work on their startup during nights and weekends.
4. Investigate Suitable Funding Options
Once confident in their business solution, founders can explore financing options from professional investors, such as angel investors, incubators, accelerators, and venture capital firms. Securing funding, especially for first-time founders, can be challenging. Platforms like J.P. Morgan’s Capital Connect can help entrepreneurs connect with investors and find new opportunities.
Data shows that seed funding is crucial for startups, with more than 80% of pre-Series A funding in 2023 coming from seed rounds, according to PitchBook. Seed funding allows startups to make initial hires, build their MVP, and start commercialization. Founders should understand how much they need to raise and key metrics like valuation, terms, and dilution.
While incubators or accelerators may offer less financial support, they provide valuable nonfinancial benefits, including access to experts, shared workspaces, networking, and mentorship.
How We Can Help Starting a business is exciting but challenging. By evaluating personal finances early, developing a prototype, and understanding funding options and benchmarks—including investing personal funds—founders can better focus their energy on building their startup.