Meet Julie and Pat. Pat is 62 and preparing to retire from his job of 30 years. Julie has four years until her official retirement. Their challenge is not retirement planning. They have built their savings and, if they follow their plan, will be able to retire with confidence.
But Julie doesn’t want to wait four years to stop rushing off to work every morning – especially Mondays and, even more, she wants to turn her passion into a microbusiness.
We’re not talking about a large investment. In my definition, a microbusiness:
Requires less than $5,000 in initial capital to start.
Earns annual revenues between $50,000 and $500,000.
Employs no more than three people, in addition to the owner.
For Julie, the benefits of starting a business could be many: She will stay active and mentally sharp by pursuing her passion, and there’s the potential for extra income. Her challenge is that financing the business, which requires an unpredictable amount of cash each month, is proving to be a budget buster.
To help Julie, I developed a budget system for launching a microbusiness. Because Julie’s business is new, it requires cash injections from her and Pat’s personal accounts each month. To prevent the business from busting their personal budget, Julie should write her business budget in advance of each month. This way, she and Pat can adjust their personal monthly budget so business expenses don’t become a surprise – and perhaps divisive – budget buster.
Revenue: To start, Julie must predict her monthly revenue – not how much she hopes to generate but realistically how much she expects to bring in.
Expenses: Next, she needs to carefully calculate the minimum expenses necessary to operate. She can divide her expenses into fixed monthly expenses and less-than-monthly expenses for which she must accumulate money each month.
The minimum necessary expenses represent the maximum amount of cash Julie and Pat would need to invest from their personal accounts to keep the business going. The equation they can follow is: monthly revenue minus minimum necessary expenses equals cash available for additional expenses or cash needed to sustain the business.
Excess revenue: Now, it gets fun. When there is excess revenue – cash available after paying all of the minimum necessary expenses – Julie can invest in growth. She should create a prioritized list of investments she believes will increase her revenue. As revenue grows, she can begin to add expenses such as a salary for herself, health insurance and retirement contributions.
A note of caution about adding expenses: Julie shouldn’t buy things in the name of the business just because she can. Money spent in the name of the business is Julie’s money, and she may want to spend it on things she values more. This is why establishing a list of priorities in advance is so important.
If Julie has leftover revenue after all of her expenses and investments, she can consider taking an owner’s draw or hiring an employee, so she can enjoy her retirement in other ways, too.
matt.kelly.durango@gmail.com. Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.personalfinancecoaching.com.
