Although industry knowledge and a strong intuition for identifying opportunities and risks are vital for an entrepreneur, it is evident when we analyze the trajectories of successful business owners that they also have a sound understanding of financial planning. This helps them make realistic plans for expansion and growth and minimize the risks of unexpected costs.
As an entrepreneur, you want long-term stability. But you also want enough wiggle room to implement innovative or high-risk/high-reward practices whenever you sense a good opportunity. Efficient financial planning is the key to achieving these goals. Conversely, bad financial planning can doom your business with no possibility of recovery.
Read on to discover our top tips for business owners who want to be prepared for any type of financial challenge.
1. Keep Personal and Business Finances Separate
Especially at the beginning of their entrepreneurial journey, many business owners use their personal capital to grow their venture, hoping for a good return on investment when the business becomes profitable. While there’s nothing wrong with that, there comes a point when your business should be able to sustain itself without you continuing to risk your money.
Businesses have an unpredictable cycle of life. When your business is successful, your personal finances improve too. But what happens when your business struggles? To avoid putting your family’s well-being and assets at risk, it’s better to keep your personal finances separate from your business finances. In case of business debts, you don’t want personal liability.
When doing financial planning, keep a separate sheet for your personal financial goals and your business goals. Analyze your expenses and determine how much of your business profit you feel comfortable spending for personal use, how much you want to save, and how much you want to reinvest. Both you and your business need savings, so make that a priority.
2. Consult Experts for Tax-Saving Strategies
Navigating business tax liability is a nightmare without expert help. As a business owner, you should strive to develop a solid relationship with a good accountant that can take care of the tax-related bureaucracy. But a tax expert, whether a lawyer or an accountant, can play even a more important role. He can analyze your particular situation and recommend the most suitable course of action for you to lower the amount of owed taxes. From teaching you to claim deductions correctly, a tax expert can present you with all legal options to keep as much as possible of your profit to yourself.
One of the scariest things for business owners is getting notified about tax liability problems. This can happen, unfortunately, even to well-meaning and law-abiding business owners. It can be an innocent mistake or a matter of misinterpreting the law, but the consequences are serious. Discovering your business owes thousands of dollars in taxes can be a real setback, but this is where seasoned tax experts can provide invaluable help. A service like US Tax Shield can offer tax relief solutions in this type of scenario. As long as you’re proactive about managing your tax liability, you can move past any challenge.
3. Develop Risk Management Strategies
Good financial planning means being prepared to face any kind of costly business obstacle. Life insurance, health insurance, and a retirement plan are great risk management strategies for individuals, but how can you protect your business?
Business owners have to consider many unwanted scenarios. Property damage, lawsuits, economic crises, natural disasters are only a few of the most common business risks. Depending on their severity, these events can halt your business operations for a significant period or even make your business obsolete. Managing risks and developing risk management strategies are thus essential in financial planning.
Think about the types of risks pertaining to your business and discuss with your financial adviser what insurance policies or contingency plans are best for your circumstances. If you have several business partners, buy-sell agreements are also an important part of the risk management strategies.
4. Diversify Your Personal Investments
Entrepreneurs have a lot of faith in their business ventures. Even when things don’t necessarily look good, they keep grinding away and investing their personal money in the hope that their business will gain momentum eventually. What happens, however, when the personal money is gone and the business still struggles to bring in profit?
Financial planners advocate for a more sensible approach. They typically advise business owners to diversify their investments; if the business staggers, they can rely on more lucrative investments to regain their footing. As an entrepreneur, putting all your money into a business is a huge risk considering how many businesses fail in their first few years. With reliable income from other investments, you can easily start anew with a better idea in case of failure.
5. Pay Yourself Fairly
Many business owners pay themselves meager salaries when their business is still in infancy. Their main financial goal is to reach business stability rather than gain personal wealth. If your business is operating on a profit, there’s no reason why you shouldn’t pay yourself a fair salary.
Although it is tempting to reinvest all the profit in the business so it can grow faster, financial planning is a long-term game. You’re not just a business owner but also an individual who needs to accumulate savings for retirement and other personal expenses. Regardless of the trajectory of your business, you need a safety net. Paying yourself a good salary is a way to minimize the personal risks if your business will not grow as expected.
Business owners often feel ambivalent about how they spend their money. On one hand, they want to expand their business and test their limits as entrepreneurs. On the other hand, they want to enjoy the fruits of their labour. With good financial planning, it’s possible to avoid bitter compromises and enjoy the entrepreneurial life with little financial risk. Whether you’re an aspiring or experienced entrepreneur, applying the financial planning tips above will provide you with a new set of tools to navigate the instability of the business environment.