Starting a small business requires a lot of effort, time, and resources. It’s not uncommon for small business owners to still maintain a full-time job while operating their company on the side. But how do you know when you’re in a good enough position to quit your day job?

You don’t want to leave your day job too early because there’s a chance your small business can close. In fact, about 20% of businesses don’t survive the first year of operation, according to the Small Business Administration. A 2018 report by CB Insights found one of the top reasons small businesses fail is because of cash flow issues.

This article will explain how to know when you and your business are in a good position so you can quit your day job.

Take a look at your cash flow

Your business’s cash flow is the amount of money that goes in and out of the company. You can use your existing cash flow to estimate how much money your business will have on hand in the future. This is called a cash flow forecast.

When small business owners conduct a cash flow forecast, they’re making sure there will be enough money coming in from customers and other sales to pay vendors, suppliers, and bills. A cash flow forecast can also help business owners find a potential gap in their finances. Identifying it early enough gives them the chance to make changes in present time to fix it.

A cash flow forecast can also tell you if your business will bring in enough money to make a profit. Ideally, you want to have a high enough revenue and profit so you can afford to pay yourself an income.

Steps to conduct a cash flow forecast:

1. Determine how much time you want to look at. It could be a quarter or even a year.
2. List out your business’s income and expenses. This includes:
   1. Customer receipts
   2. Payments to vendors and suppliers
   3. Bills due, such as utilities or business insurance premiums
3. Add the income and any cash you have on hand. Add up the expenses.
4. Subtract the total income by the total expenses.

The result should give you an estimate of your net revenue for the time period. If there’s a surplus, that’s a good sign. You can use the surplus amount to help you decide if you should quit your full-time job. Just remember: cash flow forecasts are estimates. The process is only as good as the numbers you put in. So if you’re overly optimistic, you risk over-inflating your net revenue.

Build up your savings

Having a rainy day fund or an emergency fund is important. If something unexpected comes up, your business’s savings can help cover the costs. But if you want to leave your day job and work full-time at your business, your rainy day fund should be even larger than before.

A general best practice is to have six months-worth of expenses saved. If you want to quit your day job, aim for a full year of expenses. When it comes to your savings, there’s no such thing as being over prepared. Let’s say you quit your day job after a cash flow forecast shows you’ll pull in enough revenue to be able to start paying yourself. Six months later, your business isn’t bringing in nearly as much money as you expected. As a result, you have to pay the bills instead of yourself. If you have a large enough savings, it can help offset the decreased business revenue.

So how do you build up a bigger savings? Find out how much your business spends in a year. If you want to be extra cautious, add a few thousand to the total expenses. This is the number you should aim to save up before you quit your day job. Don’t get into a habit of spending money if you don’t need to. Any time you can contribute to your business’ savings, do it. Over time, your business’ savings will slowly build up.

Have a business plan that’s working

When you started your small business, you created a business plan. If you want to quit your day job and focus on your small business, it’s important your business plan is up-to-date and working. The goal is to have a plan in place that creates an environment that will help a business grow and succeed. Take some time to review your existing business plan and see if anything needs to be updated before you leave your day job.

If it’s been a few years since you created the business plan, the industry could have changed. Maybe there’s an increase in competitors. Or maybe there’s new technology out there that has a direct impact on your business and the services you offer. Reviewing your business plan could make you rethink some of the services or products you offer.

Taking the time to update your business plan can help you develop new strategies to promote business growth. For example, if you’re planning to quit your day job, you’ll have more time to commit to your small business. That means you can update your business plan to include strategies you may not have had time for before, and focus on growing your customer base or client list.

Have a transition or back-up plan

Quitting your day job to work at your small business has a nice sound to it. In an ideal world, you’d be able to do that and have a smooth transition to your business. But it’s not always that easy. It’s OK to be cautious and take things slow or have a back-up plan.

Instead of immediately quitting your day job, you can try reducing your responsibilities at your full-time job. This gives you the ability to still work at your day job, while also putting in more time to grow your business. This isn’t always possible and depends on how flexible your employer is.

If you decide it’s time to quit your job and you realize it’s not working out being at your business full-time, your back-up plan could be to find a part-time job. That way, you have a small source of income and your business can cover other expenses. Having a part-time job still gives you time to put into your small business.

Make the right choices to minimize risk

Leaving your day job to fully commit to your small business is a big step. You want to make sure your small business is bringing in enough money to continue operating and be able to pay an income. Here’s a quick recap to help you make your decision on quitting your day job:

1. Examine your cash flows.
2. Take a look at your business plan before you make the move. Make changes before you leave your day job.
3. Build up your savings in case you run into financial issues after quitting your day job.
4. Have a back-up or transition plans in place.

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