How to prepare for self-employment

There are a lot of great reasons to become self-employed. It’s not just about being your own boss (which is nice), but for most people who take the plunge, self-employment means a deeper emotional and creative connection to the work you do. It’s your work. Picking your own path allows you to follow your passion.

It also gives you a more flexible schedule and (in most cases) takes the cap off of your earning potential. What you make of your work – figuratively and financially – is completely in your hands.

Unfortunately, increased reward means increased risk. Going out on your own can be a stressful, maddening experience. Some efforts don’t pay off. Success can be hard to achieve. Businesses fail and fail often.

But that doesn’t mean you shouldn’t try. It just means that you should be as prepared as possible.

In order to get started on the right foot, consider all of the following questions and make sure you have an answer. A successful small business starts with a smart business plan. Here’s where you start building yours.

  • What is your product/service? This first question might seem simple, but a lot of people take it for granted. Having a vague notion of what you’re selling isn’t going to work when you begin to market yourself, and it certainly isn’t going to work when you begin sizing up your competition (because you won’t really know what that is). So take time and define your product. What does it do? What does it not do?
  • What needs are you addressing? A successful product or service speaks to a specific consumer need. Understanding that need will go a long way towards informing who you pick as your target audience, how you market your product, and pretty much every other major decision you’re going to have to make. So think about who needs your product and why they need it. Find the emotional trigger that would lead them to spending money on what you’re offering and keep that information in mind.
  • Who is your target audience? You want the answer to be “everyone!” but that’s not really going to work. Who needs your product or service? Who’s willing to pay for it? Where are these customers and how many of them are there? Have people already bought your product? If so, look at your self-identified customers and try to find what connects them. It’s like hunting. You have to know what your target is first. Wandering around an empty field with a crossbow is a terrible way to catch a swordfish.
  • What makes you better? No matter how unique your product or service may be, you will always have competition. By understanding your target audience and the specific need you are addressing, you can figure out who else is addressing that need of that audience. So what makes you better? How do you stand out? Any target audience that you pick is going to have limited resources. When they spend money on your product, they aren’t spending money on someone else’s product. So pinpoint what it is about your product or service that separates it from the pack.
  • What’s a fair asking price? If you’re selling a product or you’re selling your time, you have to know what it’s worth. That can be complicated. You need to consider things like material costs, marketing costs, value of your time, and various overhead. Then, on top of that, you need to consider what similar products and services cost. Then, on of that, you need to understand what your target audience is willing to pay. If your audience can’t afford what you’re asking, your business is in trouble.
  • Will you need employees of your own? Suppliers? Are you a one-man/one-woman operation, or are there gaps that need to be filled? Where are your raw materials coming from and is there a cheaper/better way to get those materials? Creating a financially stable small business means understanding and fine-tuning every little detail.
  • How will I get my product or service to my customers? Once you understand who your audience is and where they’re located, then you need to consider how your product or service gets to them. Do you handle distribution on your own? What are your options and what are the costs? If you provide a service, does it require travel? What are the limitations and costs associated with that? Everything is connected. A great product at a great price is useless if you don’t know how to deliver it to your customers.
  • When can I reasonably expect to make a profit and am I prepared to take a loss until that time? The beginning is the worst part. Creating a business is hard enough – creating a profitable business is even harder. If you do your research and understand the landscape you’re entering, you’ll have a pretty good picture of what you’re getting yourself into. But even perfect planning doesn’t always work out. Do you have the funds and assets necessary to weather a rocky start? And if so, how far into the red are you comfortable going before you need to change your plans? You can’t be prepared for every possibility, but understanding your limits can help you make tough decisions down the road.
  • Do you need a loan to get started? What do you need to begin? Do you have everything now, or do you need to create an infrastructure? How much more money do you need? Once you’ve thoroughly mulled over the big picture points it’s time to look at the money. If you need start-up cash, what are your options? What does your credit look like? Is borrowing against the equity in your home a good idea or an awful one? They’re all hard questions, but ones you need to answer.
  • What about taxes? What about health insurance? Becoming self-employed changes a lot of small stuff and you need to keep your eye on all of it. Check out the Small Business Administration website for a ton of great information on the many details involved in starting your own business.
  • How do you balance your budget now? Becoming self-employed more or less eradicates your old budget. How you handle your money has to change. Your income and expenses will be completely different and will likely vary wildly every single month. It isn’t simply a matter of creating a new budget with new information – how you budget is going to have to change. Balancing a set income against a set list of expenses is one thing, but balancing a budget with absolutely no certainties at all is something else entirely. If you find yourself struggling with all the changes, don’t hesitate to reach out for professional help. Our debt and budget counselors are trained to help all consumers build budgets that work for their unique situations.

Becoming self-employed is a lot of work, and you don’t always get back what you put into it. But if you’ve got a good plan, lots of dedication, and just a smidge of luck, you’ll reap the personal and economic rewards you deserve.

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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