I’ve decided to write a series of articles to help you answer the question –“ Can you afford to be in business?”. This is the first article in the series, “Understand your Personal Finances”.
Why should You care?
Before you can even begin to answer the question “Can you afford to be in business?”, you need to have a good basic understand of your personal financial situation. This may come as a surprise to some, but if you have taken the leap to running an Etsy business (or any small business), and you don’t know whether your personal budget works, you may have mistakenly made a bad decision.
Consider this: Most successful businesses somewhere in the ballpark of a 5-25% profit margin. If you have credit card debt, and you’re paying 15-20% a month in interest on that balance, you’d be improving your financial position more by paying that debt off, and having no business at all, then trying to run a business, and earning a margin on what will ultimately be a small amount of revenue.
There is definitely some value to the intrinsic “running a business makes me feel good”, I will not deny that, but the trick is to make sure you aren’t digging yourself deeper with what is ultimately, another form of self gratification.
So how do You get started?
The first thing you need to do is understand how much money you bring in, and how much money you send out, every month. This may seem like a daunting task if you have not really tried this before, but we’ll walk step by step through how you can approach this.
Gather the necessary Documents
The first thing you need to do is collect all of the documents you have that display your spending each month. The easiest way to do this is to collect your bank statements, and your credit card bills. If you spend a lot of cash, there is no way to go back and analyze this information, but you can begin to write down what you spend your money on, as you spend the cash. ( I recommend avoiding using cash as much as possible for just this reason.)
Categorize into Income and Expenses
Now that you’ve gathered these documents, you need to understand what each line on the statement is for. It may seem like a lot of work at first, but the payoff will be tremendous, so stick with me.
I recommend you use a spreadsheet to keep track of your information. If you don’t have one, you can easily download a free program at http://www.openOffice.org.
For each item you have on your bank statement and credit card, write down the following information in a spreadsheet:
Date
Payee / Payer
Income / Expense
Category
Date is simply the date of the transaction. Payee/Payer is either who paid you, or who you paid. Income or expense just lets you know whether you were spending money, or getting money Category is the crucial one, and we’ll explore that in more detail here.
Potential Categories
You should not be too detailed with your categories, but not too vague either. I recommend you use categories such as Food – Dining Out, Food – Groceries, Utilities – Electricity, Utilities – Gas, Rent, Insurance – Car, Insurance – Home, etc. We will need this level of detail in the next article to help understand where your money is going, and what you can do to cut back on your expenses if necessary.
Once you have finished recording all of this information, take a break! You don’t need to do it all at once. Perhaps do one month a day for 3 days. Maybe half a month a day for 6 days? Don’t overwhelm yourself, but make sure you give it the time it deserves.
That is all for this article. In the next article we will explore the data you have collected, and gain a better understanding of your personal budget, and how you can take steps to get control over your personal spending, if necessary.
