When Katie Finnegan and Erica Bell quit their day jobs at a New York-based consulting firm in May 2012 to work on their online fashion startup, Hukkster, they hadn't raised a single cent of funding. The company wasn't even earning any revenue when the twentysomethings decided to jettison their steady paychecks for the promise of startup stardom.
"We were bootstrapping with our own savings to build out the first version of the website," Finnegan says. "It was not the safest leap of faith."
Ballsy? Yes. Impetuous? Perhaps. Recommended? Not always. Dumping a paying job to launch an unproven business concept with no profits is a big risk. But some founders do it anyway, and for entrepreneurs who are looking to secure investors, it may be a must. "Investors are going to want you in there full-time," says Chris Carey of Brooklyn's Chris Carey Advisors. "They want to know that you're working 100 hours a week on your idea."
For entrepreneurs who plan to bootstrap their way to profitability, keeping cash flowing in from a day job when their companies aren't earning much is a matter of necessity. If you take a realistic look beforehand at what you'll need to do to get your startup going, you should have a better idea of when--or if--it'll be safe to quit your day job. What you uncover by following the four steps below may be the spark you need to stay committed to your dream--or it may be an indicator that you should go back to square one.
1. Gather financial statements.
You'll need to create at least three financial documents for your business: a profit-and-loss statement, a balance sheet and a statement of cash flow. "The [profit-and-loss statement] shows you whether you're making or losing money. The balance sheet shows you how much money you have, and cash flow shows you the sources of cash," Carey says. Together, the three will provide you with an accurate snapshot of your business.
2. Forecast business performance.
With the documents above, piece together a realistic forecast of how your business will perform each month. You'll need to know how much cash you can expect to generate today and down the road.
As you build the business, you'll need to factor in sales growth along with added expenses, according to Carey. Steer clear of rosy estimates; be brutally conservative. "Typically, entrepreneurs will be overly optimistic about revenue and over-optimistic about containing costs," he says.
3. Factor in your personal costs.
When you quit your day job, you'll want to keep your business afloat, but don't forget about personal expenses like rent or mortgage. List business costs such as salaries, travel fees, benefits and auto expenses for you and any employees. Leave out costs associated with certain niceties you'd like in the future, such as healthcare benefits or new equipment--they're irrelevant to your goal: quitting your day job. As for assigning yourself a salary, "Just make it whatever you need to get by, nothing more," Carey says.
4. Get a second opinion.
Even the most level-headed entrepreneurs should ask for a second opinion before moving forward, says Kevin Spain, a general partner with Emergence Capital Partners, a venture firm in San Mateo, Calif. While an accountant is likely worth his or her weight in gold during this process, you might also tap a trusted colleague or friend for an opinion. Says Spain, "Have someone who you trust take a look at your financial projections to ensure you're not being overly optimistic."