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How to Start a Business--and Still Eat

It’s the biggest question would-be entrepreneurs face. How much can I make as my own boss? Here’s how to run the numbers.

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by Elaine Pofeldt

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When Ellen Rohr, 53, teamed up with her husband Bob, 60, to run his plumbing business after studying business administration, she thought they’d be able to turn a profit at the prices they were charging. Big mistake. “We went deep into debt. Our relationship was falling apart,” she recalls of that awful period in the 1990s.

After writing to a columnist at a trade magazine for help, she realized the company needed to raise its prices to stay in the black--ultimately increasing them from $30 an hour to $350. The couple turned the company around to the point where they could sell it. She now advises other skilled service companies on how to improve their operations at a new company, Bare Bones Biz, in Rogersville, Missouri.

Rohr’s problem was a common one. It’s hard to anticipate how much you’ll make in a type of business that’s new to you—especially if you’ve never run a business before. “That’s the number one question people want to know: How much money can I make?” says Brian Miller, who advises business owners on how to get better results as chief operating officer at AdviCoach, based in Southbury, Connecticut.

First-year enthusiasm can be amazing fuel for a business, but it doesn't necessarily result in big revenues or much take-home pay immediately. Attracting customers takes time -- and even seasoned corporate pros are likely to make a few mistakes along the way. “People are not always aware there is a ramp-up time to replace or exceed your current income,” says Miller, who also advises clients on buying a franchise at a separate business called The Entrepreneur’s Source.

That said, at many businesses it is possible to earn a full-time living the first year, even if it’s not a lavish one. Here are some questions to ask to help you determine how much you’ll realistically be able to take home from a small business early on, so you can plan.

1. How much do you want to earn? If you’ve spent most of your career as an employee, you’re probably accustomed to your boss calling the shots about how much you can make. As a business owner, it’s up to you to decide how much money you want to bring in—and to go after it. Do you want to build a million dollar company, a one-person business where you can match your earnings in a corporate job, or a source of part-time or seasonal income? “People need to be clear on what they want the business to do for them,” says Miller. Knowing the answer will help you make the decisions that get you to your goal.

Coming up with a revenue goal will also help you stay focused, says Rohr. Say you want to earn $200,000 this year to cover your overhead, salary and profits. Breaking that down into a monthly benchmark will push you to make the daily and weekly decisions that get to your ultimate goal. You may discover along the way that you need to raise your prices, as Rohr did, or add more profitable products or services. Leaving your revenues to chance is a big mistake, says Rohr. “You can expect to make zero if you don’t plan on a certain amount,” she says.

2. How much have other people earned in similar businesses? If you’rebuying a franchise, it’ll be relatively easy to figure this out. Many franchisors now offer a document called a Financial Performance Representation, says Miller. Within that document, “Item 19” will give you an idea of the potential ranges of revenues, profits and income it is possible to earn.

For other types of business, you’ll need to do some homework by talking to people who run similar businesses, ideally in your region. Some organizations for small business owners and freelancers survey their members about revenues or salaries, which can give you a ballpark idea of what you can earn.

If you’re venturing into an evolving field, project conservatively. Debbie Mitchell, 49, a former TV producer from New York, and Rachel Ferrucci, 43, a Connecticut grandmother who got into blogging after starting a bath and beauty products line, launched The Blogger Connection together. The business matches brands with blogs on which to advertise. Neither business partner counted on the startup for an immediate, steady income, and they planned their finances to give the business time to grow. “Anyone who goes into a business thinking you’re going to make tons of money the first month or two is dreaming,” says Ferrucci. Seven months in, they’ve been steadily picking up clients.

When in doubt, test a business idea while you’re still employed by starting your business on the side. You’ll quickly learn how receptive customers are. “Start thinking about whether you need to do other things to supplement your income while you get set up,” advises Andrea Nierenberg, an executive coach in New York City.

3. How much overhead do you face? Everybody knows that revenues will be greater than take-home pay. However, many would-be business owners underestimate expenses like taxes and insurance—or neglect to plan for additional, unexpected rounds of investment, like upgrades to a website or additional marketing.“If you start drawing too much money from the business the first two years, it doesn’t allow your business to grow much,” says Rohit Arora, founder of Biz2Credit, a New York City based loan broker that serves small business owners. While investing in your business may reduce your paychecks in the short term, it will lead to a bigger payoff if you sell the company later.