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Taking the Plunge: Budgeting and the Entrepreneur

Budgeting

Welcome back to my Taking the Plunge series where I discuss the process I went through as I decided to give up my corporate job and pursue the life of an entrepreneur. If you’ve not read the beginning posts of this series, then I encourage you to do so now so you can have a sense of where I am coming from.

I’ve written of my love for budgeting before and am a proud budgeting nerd. When Mrs. Frugal Rules and I were looking at the possibility of running our own business, budgeting was at the top of the list in terms of asking if we could handle it. Nearly a year after making the decision to take the plunge I can safely say balancing budgeting and being an entrepreneur CAN be done.

Becoming an Entrepreneur is Not For the Weak of Heart

 

When it comes to running your own business you learn quickly how much of it is up to you…EVERYTHING is on your shoulders and I mean everything! No one is there to direct your activity; you must do that for yourself.

I learned awfully quickly that having a roof over our heads and food in our kitchen was a great motivator. You have to learn to accept rejection and move on without dwelling on it. You have to learn to plan things ahead and have a vision, while still being flexible enough to change on the fly. If you are fortunate and your business plan is a good one, your business will grow to the point where other good “problems” may arise; such as needing to have a CPA do your taxes for you, or getting an attorney to LLC or incorporate yourself.

You may even need to hire employees to handle your growth. You may even someday find yourself needing corporate tax services. Thankfully we have services like Freshbooks and Personal Capital that help us manage our payment times as well as managements in order to save us time and money. When you get to that point of needing help, hard work, strategy, planning, imagination and budgeting will have gotten you there. You have to learn that clients will be unclear about what they expect and then say they want you to redo things because it’s not what they want. You have to learn that well-meaning people will say they want to do business with you and then you hear nothing from them ever again.

Most importantly you learn that you ALWAYS have to be meeting new people and networking. All of these things can play on your emotions and can be wearing on a person. I believe, though, that we went in with our eyes wide open and in spite of some challenging days, are loving every minute of it. What lies beneath all of this is the power of budgeting as you have to budget all of your resources and not just money. We’ve learned how to budget our resources through our household budget which has set us on solid ground.

Budgeting Needs to Become Second Nature

 

When my wife and I were in serious discussion about taking the plunge we looked long and hard at our budget. We looked at what could be cut and what was essential. Since we’ve lived with a budget for nearly ten years, this was second nature for us. The difference this time was that our budgeting had to be vigilant. There was almost no wiggle room. We looked for budgeting tips and ways we could stretch our budget further and looked long and hard at our emergency fund and what might happen if this whole entrepreneur thing were to blow up in our faces.  Little things like canceling our cable and switching to a reliable T1 connection with a subscription to Netflix really helped.

Where we sat when we decided to take the plunge was a fully-funded emergency fund to cover three months of living expenses and a separate emergency fund that covered six months of mortgage payments. Now, some PF bloggers might say that’s way too little, but I was and still am comfortable with it. We also knew that we would continue to save money until we reached six months savings for our main emergency fund and nine to twelve months for our second emergency fund. With this cushion in place, we decided that we could take the risk, but that budgeting was going to have to be something at the forefront of our minds for quite some time as we develop our business. This meant tracking expenses and watching where our money was really going so we would not have to dip into our emergency fund.

Lack of Money Flow is Not a Budgeting Issue

 

A common excuse I hear from those that don’t like to budget is that they do not have the money or simply that they do not like budgeting at all. I get the second point as not everyone is a budgeting nerd like me and that’s completely fine. But, that said, as long as you have some mindset about saving money, you can budget. I can understand lack of money flow and the feeling that budgeting just won’t work.

Our income fluctuates all the time, but budgeting can still be done. When you have a paycheck come in you’re already creating a budget in your mind, whether you know it or not, as to where the funds will go. That is what I like to call the Minimum Needs budget, or the “what you need to keep the lights on, food on the table and a place to live” budget. If you’re making enough to cover those things then start budgeting around that. The beauty of the Minimum Needs budget is that when we bring in extra money we get the fun of deciding where it will go. Speaking as an entrepreneur, who regularly experiences irregular cash flow, I can say that saving that money becomes even more important so you can smooth out leaner times.

Taking the Plunge to running our own business was not a decision made lightly and is not one we would’ve made if we were not already happily budgeting our income. There can be many risks when it comes to running your own business, but adding lack of a budget to it makes it even riskier. If you would like to read more about budgeting when you have irregular income, please read my post for Kim at Eyes On The Dollar that I wrote several months ago that gives the more practical side of budgeting and how to do it given this situation.

 

Do you run your own business or have you thought of running one someday? If you do now, how important is budgeting to your business? Are there any questions you’d like to see me cover in this Taking the Plunge series? If so, just put them in the comments below.

 

Photo courtesy of: Linusb4

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally

49 Comments

  • Pauline says:

    Really, that’s what she said in a budgeting sentence? :) I have a hard time mixing budgets and fun. Since I have been working on my own I have had a loose budget, knowing that there are almost liquid assets I can sell in case of emergency is enough for me. I could sell them, maybe at a loss in the case of stocks, but I take a chance of earning something if there is not emergency.
    And about a month of expenses in cash, to avoid selling assets every month.
    I enjoy your series, and your wife covered a bit the working from home topic although I’d like to hear more about organization and making the business real to customers when you are at home, do you meet them in your home office, do they mind not seeing offices, etc.
    Pauline recently posted…13 money resolutions for 2013: #12 make a plan!My Profile

    • John says:

      You really do have to go with what works for you Pauline. What some might consider ok, others think are risky or crazy. Essentially, whatever helps you sleep at night is best in my books.

      Thanks for the suggestion on the post topic! I have been thinking about doing something on that previously, so your comment is a good reminder for me to do that. The beauty is that a lot of it is done online so we really don’t have to meet clients much, other than the initial meeting of course.

  • These are great tips! I think we will be taking the plunge and having one of us stay home in the near future. Both working 9-5 is wreaking havoc on our lives and we are making enough side income that I believe we can grow it enough in the next few years for me to quit my job. Thanks for givng us something to think about.
    Holly@ClubThrifty recently posted…Juicing Vegetables: My Unfrugal ObsessionMy Profile

    • John says:

      Thanks Holly! I can understand how working on top of side work could be a bit much…especially with little ones running around. Having the ability to have one of you work while the other “quits” to pursue your own business is a great way to do it, we did it ourselves and gave us some stability and confidence that we could go all in.

  • I have often thought about making the jump into running my own business, but I want to make sure we are a bit more financially stable than we are at the moment and my current corporate job (which I hate) brings in too much money for me not to stick it out for at least a few more years.
    Glen @ Monster Piggy Bank recently posted…Financial Plans to Make Before MarriageMy Profile

    • John says:

      That’s a very valid concern Glen, and one that I do encourage you to be mindful of. There is a lot, putting it just a BIT mildly, that goes into running your own business. Having a good base to work from is vital and can help breed confidence.

  • Laurie says:

    Rick and I often toy with the thought of having our own business once the debt goes away. Have you done a post on how to successfully market your business? I guess our main fear in going full-time into entrepreneurship is “What if we don’t market successfully and therefore don’t get enough business?”
    Laurie recently posted…Motivation: Learning From OthersMy Profile

    • John says:

      That’s one thing that would have held my wife and I back in starting our own business…debt. So, great for you for wanting to get that out of the way first.

      I’ve not done a post on that, so thank you so much for the suggestion Laurie! I’ll be adding that to my calendar as it is a very vital topic in growing your business.

  • I’ve toyed with the idea of beginning my own business for a few years now, and I think I’m finally at the point where I can comfortably take the plunge. I’m enjoying this series!
    The Happy Homeowner recently posted…Personal Finance and Lance Armstrong: What You Can Learn from Lance’s Fall from GraceMy Profile

  • Jennifer Lynn @ Broke-Ass Mommy says:

    Being an entrepreneur is such a labor of love and dedication and perseverance. I admire you and Mrs. Frugal for making such a gusty move. Budgeting is critical, and I try to make sure to faithfully funnel at least 20% of all of our income into long-term savings, for those leaner times. Those little bits add up! I would love to hear more details regarding your beginning hurdles…and where you now are a year into establishing your own business. How did you build up a client case, for example?
    Jennifer Lynn @ Broke-Ass Mommy recently posted…Time to establish financial and savings goals for 2013.My Profile

  • I have to say that I am becoming a budget nerd as well. Without the credit card debt, there are so many more fun and useful ways to use our money. I’m at the tail end of my business ownership saga. It was obviously different as it was already well established and is a brick and mortar operation, but same rules apply. The buck stops with you. I’d love to read about some of your lean times or when something fell through and how you dealt with that.
    Kim@Eyesonthedollar recently posted…Benefits of a Crappy JobMy Profile

    • John says:

      Yay!! We’ve converted you…Lol! ;) I could not agree more about the credit card debt aspect Kim! I love the freedom we have now to buy things when we want to and not feel guilty because it’s just going on the card with no knowledge of how we’re going to pay for it.

      You’re right…a brick and mortar business has the same rules that apply to running any other business…mainly it is all up to you. It seems like the lean times idea is a common theme I am seeing, thanks for the idea.

  • One of the things I’m starting to slowly learn just as a blogger is I responsible for content creation, marketing, HR, management, and budgeting. Entreprenuership is not for the weak is an understatement!

    My wife and I were talking the other night and came up with a fantastic idea. I think a highschool class should be required to start a blog and drive traffic to it. No sales involved what so ever. Blogging is like owning a mini business, readers find you because you are providing something they demand, they come back because what you provide adds value to their lives. This is the essence of business.

    If you conducted this experiment for appoximately 5 years I believe you would start a grassroots movement of young men and women who understand business at the most basic level.
    Brick By Brick Investing | Marvin recently posted…How To Use Bull Call SpreadsMy Profile

    • John says:

      You’re exactly right Marvin in that there is much involved in running a blog, especially in driving people to it. Jeremy over at Modest Money actually did a great post on that today.

      The class idea is a wonderful one Marvin! It is all about adding value. Pretty much anyone can put down thoughts on a page or screen :), but it’s the value added nature that does continue to bring them back over time.

  • Great post John. Since my business is my side business, I don’t have a budget for it yet. The reason being is that I reinvest any proceeds right back in and don’t take any money out. This makes the budget pretty easy. If I have the money to do what I need, then I do it. When running my other business, I learned quickly that a budget was essential.
    Grayson @ Debt Roundup recently posted…Are You In Debt? Stop The Expensive Vacations!My Profile

    • John says:

      Thanks Grayson! That makes total sense and is a tactic I am using, for the most part, with my blog. It does make things pretty easy, especially when there are a few things you want to take care of.

  • Mackenzie says:

    I am really enjoying this series John. Budgets are important for many, but especially with fluctuating incomes.
    Mackenzie recently posted…So, I Knew This Girl…My Profile

    • John says:

      Thanks Mackenzie! It seems as if the things I can write on in regards to this topic is growing by the day. :) I could not agree more on the budgeting aspect, it is vital for us.

  • I do run a side business but do not have a budget for it as I do not rely on the income as it all (mostly) goes toward my girlfriend’s student loans fund. I wouldn’t budget expected income because it isn’t predictable but I would schedule where income would go first second and third etc if I relied on it.
    Lance at Money Life and More recently posted…How We Set Up My Girlfriend’s BudgetMy Profile

    • John says:

      I can totally understand that Lance and would likely do the same thing in your situation. We do a very similar budget for what income comes in so we know where to go with overages.

  • AverageJoe says:

    I’m a guy who’s been known to argue for larger cash reserves but this isn’t one of those cases. You evaluated your situation and found the right budget for you. It works, and is a responsible, thought out plan. I generally have a problem when a blogger espouses a smaller cash reserve for everyone, not realizing how many people are potentially going to read that advice and how different our situations really are. A thorough plan is the only responsible method to determine your emergency fund, especially if you’re contemplating entrepreneurship.
    AverageJoe recently posted…College Planning Strategy: A Creative (and Effective) OptionMy Profile

    • John says:

      I am usually the same way Joe. The fact is that there is not a cookie cutter approach to everything, but I do believe that a significant cash cushion is vital and even more so when you run your own business. Great point on having a thorough plan…I am probably too thorough, but I’d much rather go into it with the confidence that we have a solid base.

  • krantcents says:

    Budgeting is important for business and personal life as well. It is the structure to help you reach your financial goals. I have done budgets, 5 year plans, strategic plans and long range planning throughout my career. It is second nature to me now and I perform a mini expense analysis every month to watch for trends or reduce expenses.
    krantcents recently posted…I Will Never Retire!My Profile

    • John says:

      I completely agree sir. I really view it as a plan to help us get to where we want to be. I’ve not gotten to your extent yet, but I am working my way towards it. Being the budgeting geek I am I am sure I’ll like it. :)

  • Boris says:

    “ALWAYS have to be meeting new people and networking”. This is true, connections are the way to go. John it seems like your network is amazing though!.
    Boris recently posted…Frugal Foraging – Three Wild Mushrooms I Have LovedMy Profile

  • I project my cash flow instead of budgeting. When it comes to expenses related to my online endeavors, I’m a tight-fisted Scrooge if there ever was one.
    Edward Antrobus recently posted…Do You Have What It Takes to Be a Paper Boy?My Profile

    • kathryn says:

      Before I quit my job, we lived on our business income for a year, to see if we could do it.
      In this time you may want to apply for all the credit cards you think you may ever need, because once you have self employed income, t becomes harder to access (IMO)

      • John says:

        That’s a very good way to approach it Kathryn. We did something similar in making sure we had enough coming in each month to cover our absolute basics with a good prospect of making more. In regards to the credit cards though, I actually have found no change in being approved in getting them ourselves since taking the plunge.

    • John says:

      I can be a bit of a Scrooge myself Edward, in fact I seemed to have trained my wife to be even more so. :)

  • Our business income fluctuates as well but often we know that in advance and now that we follow a budget it is easier to make adjustments to compensate for that.
    Tackling Our Debt recently posted…Fun, Easy Ways to Teach Your Children About Money – InterviewMy Profile

    • John says:

      Those fluctuations can be tricky, can’t they? ;) Thankfully we have enough of a base that we can “count” on each month plus some additional projects that are generally going on so we can be prepared for leaner months.

  • Lakita says:

    This is an excellent piece David. It really takes a lot to be an entrepreneur. Entrepreneurs have to make many sacrifices before achieving success. Your other point is also good. Budgeting is another attribute that consumers should adopt.
    Lakita recently posted…Eating Well but Saving MoreMy Profile

  • I know exactly where you are coming from John, I took over my fathers business in early 2009 and I remember thinking how in the world am I ever going to make this work. I had to invest money up front and worst of all it was a high overhead manufacturing business with all kinds of cost from steal to paying my employees. I can defiantly attest that starting a business is not for the faint of heart.

    On the other hand one thing I did to make things easier is I went in business with a partner to help with the cost and management which helped out a lot and meant I didn’t have everything resting on just my shoulders.

    • John says:

      I know that feeling all too well Chris…thinking how on earth am I going to run a business. In the end I think a lot of that was fear based and really did not appear until I made the final decision. I could not imagine having a business with high overhead and having employees depending on me. Kudos to you!

  • No, we don’t run our own business but if we did you can bet we would STILL be budgeting. I always refer back to any business out there, likely the job you even walked away from used a budget. What business could survive if they didn’t have an annual budget? Probably not many because they would have no idea where the money was going, how much they had to spend and if it was working for them. Our lives are no different than a business, in fact we look at our finances like we are a business. We are in the business to keep the lights on, put food on the table and a roof over our heads. If that’s not enough motivation for someone than I don’t know what is. Great post mate.
    Canadian Budget Binder recently posted…Why Has My House Not Sold?My Profile

    • John says:

      That’s a great way to look at it Mr. CBB! Running your household like a business is a great way to view your budget and I agree it does provide ample motivation.

  • It was something I totally ignored as a freelancer and the biggest mistake I ever made. I could have saved myself so much grief (and money) if I operated within a budget. I had so much money saved but I blew through it so fast. This is #1 for sure to becoming a successful freelancer. Essential!!!
    Budget & the Beach recently posted…Dream TechnologyMy Profile

    • John says:

      I hear you Tonya! It can be very easy to let it slide by if you’re not having a predictable and consistent pay stream coming in. We dealt with some uncertainty ourselves, but this is the time to make it even more a vital part of your life.

  • John, I plan on doing this some day. I just get such a better sense of satisfaction working for myself. I also like seeing direct results from the work that I put in.
    Harry @ PF Pro recently posted…My New HSA Strategy – Rollovers and Trustee TransfersMy Profile

    • John says:

      That’s awesome Harry! Being able to see those direct results is a major high. It’s awesome to see that what I or my wife has done has brought in business and thus getting us closer to our vision.

  • We rely on his income right now and it DEFINITELY varies. So we’re very familiar with the minimum needs budget. :p Great post!
    femmefrugality recently posted…Wish My Black Thumb LuckMy Profile

  • David says:

    Hi John, You said it right. We need to take the plunge once in a while. We also have to learn how to become clever entrepreneurs. The future of our business depends entirely on us. Hence, we have to know the right time to take risks. At the same time, be on top of everything since this is your enterprise.

    • John says:

      Great points David. Being clever and being able to make wise decisions is vital in entrepreneurship. Risks can be great if you do them wisely, but if done rashly can lead to bad results.

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