So you've got a brilliant idea for a business. Now what?
Getting a business off the ground isn't just about finding start-up money. Behind the scenes you've got to be able to live and ensure your personal finances don't go backwards.
Kathryn Carmont is right in the thick of that challenge. The former deputy principal has got it all going on: husband; two children, aged 7 and 4; the mortgage; and now a five-month-old business. Inspiration for her membership site, ThermoHub, a meal-planning tool for Thermomix fans, came from her jam-packed life.
"We've managed to get meal planning down to 15 minutes and that's including writing the shopping list," she says.
To get started she and her husband agreed to her using up to $30,000 of savings from their redraw account. The upside: a low interest rate; no need to justify it to a bank; and it doesn't add extra cost to their personal budget.
On the flipside it can create additional pressures within the family. As she acknowledges, her husband is an equal investor in the business. "His commitment to the business is he's working really hard to cover my wage," she says, adding their overall goal is still to pay off their home. Her husband accepted work in Papua New Guinea for three months, which in turn means Carmont is carrying extra load on the home-front.
Fortunately, members are growing and covering ongoing business costs. It won't be long before Carmont can draw a small wage.
"If the business itself was earning nothing, we would have pulled the pin by now," she says.
People go to great lengths to give their business ideas lift-off. Tamar Krebs, the founder of Group Homes Australia, pitched to 38 investors. Others resort to credit cards; appearing on Network Ten show Shark Tank; applying to the bank of mum and dad; or even living in their car.
So how do you ensure your personal finances are ready to start a small business?
Check your cash flow
Michael Miller, owner of consultancy MLC Advice Canberra, starts by looking at debts. "If they have a home and a mortgage already, are they ahead on their mortgage repayments ??? and is it two months, three months or is it a longer period of time? That's a really good measure.
"Then it would be useful if they have a good handle on their cash flow: what they need to meet their living expenses."
Louise Lye, business adviser at consultancy Realise Business, recommends putting a limit on the money you put into the business before it has to start paying back. "I think three months is about the maximum you can go without the business producing something."
For Meagan and Brett Redelman, who launched prams and nursery gear business Redsbaby in early 2014, that limit was their $40,000 house deposit. Within three months their online pram business was cash flow positive and turnover last financial year was $6 million.
Reaching that level of success relied on a combination of factors. They didn't immediately jettison their jobs. "The idea came to us in early 2013," says Meagan. "Brett was working in finance and I was working in product marketing management." Brett left his job to work on the idea full-time in mid-2013 and six months later Meagan joined him.
They made their initial $40,000 investment work really hard, operating the business from home and initially housing stock in Brett's parents' garage. "Then as the business started to turn over higher revenue we were able to one step at a time move up to the next level," says Meagan. For instance, when they rented a storage facility they continued to unpack containers themselves.
While they drew a small wage from the business within three months, it took about 18 months before it was comparable to their corporate salaries. So their careful approach extended to personal spending. Brett says they pulled back on going out for dinners, travelling interstate and holidays as they built the business.
Relying on their own savings rather than borrowing or getting investors kept them very focused, he adds.
Lye says: "Sometimes the worst thing is when someone has got an inheritance; a payout from a divorce, or a redundancy. They've got this big pool of money and so they are not cautious. It is sometimes better to not have the money because you have to be creative about how you pay things and what you pay for."
Elyse Daniels, who started her custom jacket business Exodus Wear in 2009, with a $6000 loan from her parents, believes a lot of businesses need only $1000 to get started. "With $1000 you could get an ABN, domains, G-suite, Wordpress theme, logo, Xero subscription, hosting and a freelancer to set up a basic website."
How you fund a business can have an impact on your personal finances in both the short and long term. Miller says credit cards are a high-cost way to start a business and using a redundancy payout or savings can be preferable to putting up your house as security for a business loan.
"If the business doesn't succeed, at least they don't have their house on the line," he says.
Lye says it's important to be aware of the true cost of funding alternatives too. People using redraw might think they are paying only about 4.5 per cent in interest. "But if you take a loan over 20 years that's a lot more interest than you're paying on an 11 per cent business loan and you haven't got that enforced discipline of repaying the amount."
While an investor can help get a business off the ground, it can cap your upside when the business succeeds. "At the time when you need it the business can't justify its future value so an investor will want to take a much bigger percentage," says Lye. It can also get tricky when the investor wants to get out. "People don't write very good shareholder agreements with good exit clauses."
Protect your assets
Self-employment comes without the safety net of sick leave. So you may need a bigger financial buffer to deal with the unexpected. Miller checks income insurance for those transitioning from employment. Under a policy's indemnity definition you may be covered for only 75 per cent of the income you've earned in the past 12 months. That has ramifications if you carry the policy over when you become self-employed and you are not initially earning a similar amount. "If something happens you might not get that full benefit," says Miller.
Keep personal and business finances separate
Sole traders should open a separate business bank account. Plus, Lye suggests: "If you're putting money into the business, set that up as a loan from you to the business so you know when the business is actually viable."
The story How Kathryn started a Thermomix business without breaking the bank first appeared on The Sydney Morning Herald.