____________________________________________________________________________
The world of entrepreneurship is no less than exhilarating. From the thrill of your first sale to the pressure of managing cash flow, there’s never a dull moment. But as much time as you spend on developing or perfecting your offerings, it’s just as important to focus on your financial future.
Financial challenges are a primary reason small businesses fail. Research from the International Journal of Economics, Commerce & Management supports this fact. Developing strong financial habits is the key to both navigating difficult periods and securing lasting peace of mind for your business.
In this article, we’ll explore a few practices that can help you build a solid financial foundation.
#1 Pay Yourself a Realistic Salary
It might feel unusual to pay yourself from your own business, especially when starting out. But a steady income is necessary for personal living expenses.
It is a great way to prevent a common blunder many entrepreneurs make. That is, blending their business and personal finances. When personal funds deplete, entrepreneurs tend to pull too much from the business. This can lead to premature business failure.
But if you pay yourself a regular employee salary, you’ll enjoy more stability. That is because taxes are typically withheld from payroll.
To keep things fair, the Internal Revenue Service (IRS) asks that this salary be reasonable for the job. That means it should generally line up with what people in similar positions typically make, and also consider how the business is performing.
Balancing personal and business needs can help determine this amount. List your personal expenses first. Then, subtract all business expenses, such as rent, from your total revenue. Don’t forget to set aside money for taxes, including self-employment tax.
From the remaining profit, allocate percentages: for example, 30% for your own salary, and the rest for the business.
#2 Diversify Your Income Streams
There is no denying that much of your wealth is naturally tied up in your business. This is great, but it also means your financial future is heavily dependent on its success.
Diversifying income streams acts as a protective shield against economic downturns or market changes. Beyond just reducing risk, this creates new avenues for growth and expansion.
There are numerous intelligent strategies to expand your business revenue by building on your existing assets and expertise.
You can, for instance, share your expertise by creating an online course, which can generate income for years after initial creation. Uploading content to platforms like YouTube can help you earn money from advertisements. Have unused space, like basements or garages? You can rent them out for wine storage or for keeping cars.
#3 Plan for the Unexpected
Life as an entrepreneur is often a roller coaster, full of unpredictable ups and downs. Unexpected events, from a sudden drop in sales to a major equipment breakdown, can hit hard. Having a strong financial safety net in place helps you stay calm and keep your business running smoothly.
Build an emergency fund. Aim for at least six months of personal expenses saved up, separate from your business funds. That way, you have enough money to cover essential expenses during unexpected adversities.
Insurance is also a must-have. Besides general liability insurance, invest in professional liability and workers’ comp insurance.
Don’t stop there; think about the long game, too. Prioritize a realistic exit strategy and succession planning to make sure your business can continue smoothly if you ever have to step away. Whether you plan to sell, hand it off to a family member, or close the doors someday, you need a clear roadmap.
Smart exits don’t happen overnight; it takes years to cultivate them. According to Richard P. Slaughter Associates, this foresight leads to:
- Greater clarity in your personal as well as business goals
- Increased revenue and operational efficiency
- Better prepared successors, buyers, and employees
- Optimized timing to align with favorable tax and market conditions
Despite the benefits, a study shows that only 35% of businesses have a formal succession plan in place. Make sure you’re not part of them.
#4 Invest in Financial Education
Learning about money is one of the best investments you can make as an entrepreneur.
Financial literacy equips you with the knowledge to make smart money decisions throughout your life. It helps in setting financial goals, effectively managing cash flow, and planning for the long term.
Many entrepreneurs make some common mistakes, such as not regularly monitoring their finances or overlooking financial statements. Gaining financial knowledge directly helps in avoiding these common pitfalls.
Understand compound interest, learn the difference between good debt and bad debt, and get familiar with basic investment principles. You’ll find books, podcasts, and online courses that make complex financial ideas easy to understand.
Consider working with professionals, too. A good accountant can save you money on taxes and help structure your business more efficiently. A financial advisor can help you plan for long-term goals and make sense of investment options. Yes, they cost money, but good ones pay for themselves many times over.
Tying it all together, running a business is always going to have highs and lows. But these practices can help you build a stronger financial future. Adopt these today, and you’ll build a life of financial freedom and security. At the same time, you will set up your business for long-term success, regardless of the challenges that come in its way.
