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The One Thing Entrepreneurs Must Get in Order Before They Launch a Business Entrepreneurs may be excited to start a new endeavor but if this area is in shambles, they are going to have a difficult time running their startup.

By Eric Tyson Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Having your personal finances in order is one of the most under-recognized keys to achieving success in your small business. Just one significant money oversight or mistake can derail your entrepreneurial plans.

Getting your finances in check will buy critical time needed to make a success of your startup. Here are few tips before you make the leap:

Solicit input from loved ones. The financial and emotional stress that running a small business puts on many entrepreneurs not only affects them directly but also impacts their family members -- especially spouses and children. Before you commit, schedule time to discuss their concerns, needs and the required financial burden related to your plans to start a small business. What role, if any, would they like to play in the new business? Coming to an understanding and agreement as to which personal assets, such as savings and home equity, can be used for the business will be especially important.

Related: Taking Care of Your Loved Ones When Your Business Can't

Assess your financial position and goals. Where do you stand in terms of retirement planning? What about your children's educational costs? What type of a home do you want to buy? These and other important questions can help shape your personal financial plans. Sound financial planning means taking a hard look at where you are, figuring out where you want to go and making sure you're prepared for any adverse conditions along the way -- a process, incidentally, that isn't unlike what you'll be doing when you run your own business.

Reduce consumer debt. If you have outstanding consumer debt, pay it off sooner rather than later. If you must tap into savings to pay down your consumer debts, then do it. Many people resist digging into savings, feeling as if they're losing hard-earned money. Remember that your net worth -- the difference between your assets and liabilities -- determines the growth of your money. Paying off an outstanding credit card balance with an interest rate of 14 percent is like finding an investment with a guaranteed return of 14 percent, tax-free.

Secure proper insurance. Make sure you're properly covered by insurance. Without proper insurance coverage, an illness or an accident could quickly turn into a devastating financial storm. Buy long-term disability insurance if you lack it. This most-overlooked form of insurance protects against a disability that curtails your greatest income-generating asset: your ability to earn money. If anyone depends on your employment income, buy term life insurance -- which in the event of your death will leave money to those financially dependent. Make sure your health insurance policy is a comprehensive one. Your lifetime benefits should be unlimited and if the policy has a maximum, it should be at least a few million dollars. To protect you in the event of a lawsuit, your auto and home policies' liability coverage should have at least enough to cover twice your assets.

Related: To Build Wealth, Treat Money Like a Jealous Lover

Shrink your spending. Do all you can to reduce your expenses and lifestyle to a level that fits with the entrepreneurial life you want to lead. Now is the time to make your budget lean and entrepreneurially friendly. Determine what you spend each month on rent, mortgage, groceries, eating out, insurance, and so on. If you refuse to question your current spending or if you view all your current spending as necessary, you'll probably have no option but to continue your career as an employee.

Build up your cash reserves. Your wherewithal to stick with an entrepreneurial endeavor depends, in part, on your current war chest of cash. At a minimum you should have three to six months of living expenses invested in an accessible account -- such as a money market fund with low operating expenses. After you finish paying off any consumer debt, your top financial priority should be building this account. The bigger the war chest, the better. Try to work toward accumulating a year's worth of living expenses.

Related: Lessons From a MLB Player About Financial Planning

Eric Tyson


Eric Tyson, a former financial counselor, is the best-selling author of Personal Finance For Dummies and co-author of Small Business For Dummies. He is dedicated to teaching people to manage their money better, and to successfully direct their own investments. Eric's most recent title, Investing For Dummies, is a resource covering an array of topics including how to develop and manage a portfolio, invest in stocks, bonds, mutual funds, and real estate, open a small business, and understand the critical tax implications of investing decisions.

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