It is an exciting time to be an entrepreneur and a business owner. The possibilities for income are endless, unlike a typical salaried position, and you are able to provide for your family on your own terms. Not to mention the advantages of being your own boss and creating a corporate culture that aligns with your personal values! As an entrepreneur, hopefully you have the opportunity to design a career doing something you both love and find deeply fulfilling.
If you’ve already established your business, you probably rely on it for more than an income. Perhaps your business delivers personal gratification, or a way to help others beyond what you ever dreamed. It’s your livelihood after all; one you should take great pride in. But when it comes to what the future holds, have you thought about what your business will look like? Ten years down the road – will you rely on your business to pay for your child’s college education, or fund your retirement?
Many business owners get so caught up in the day-to-day operations of their business that they forget to think about how to safeguard their finances and their family. We don’t blame you – running a business can require much more than an eight-hour workday commitment. If you’re relying on your business as your nest egg or the main source of your income, managing your business finances and protecting them properly is absolutely necessary.
Part of protecting your business is being smart about your business finances. These are just a few tips we recommend for business owners to keep their personal finances in line!
Keep your Business and Personal Finances Separate
This is rule number one if you’re a business owner or starting a new business. Don’t muddy the waters! Keeping accounts separate is a crucial element for tax purposes and also necessary for understanding exactly what your business is worth. Keep ALL your business transactions separate from personal ones – including a business bank account and a business line of credit. Keep track of all your expenses (hello, paper trail) and make sure they are dedicated to business only and are justified as such. Mixing the two is only asking for trouble!
Set up your Business in a way that Protects your Personal Assets
Choosing the right corporation or partnership for your situation when you set up your business plays a significant role in your level of liability. What happens if you go bankrupt? What kind of set-up is the best for the sort of business you’ll be conducting? How is your income taxed? If at all possible, it’s worth it to consult a professional and explore your options before you’re too far down the road with your business.
But let’s say that you’ve already got a business. You’ve been working for a long time and it’s now matured. You’ve got a lot of money invested in it and this is your retirement plan. What now?
Save for Retirement OUTSIDE of your Business
What? So many business owners simply rely on their enterprise for retirement. But did you know that a small business owner, in 2019, could contribute up to 25% of your earned income, or $56,000 (whichever is less) to a SEP IRA? 401(k) Plans, target benefit plans, or defined benefit plans can offer even higher contribution limits in excess of $100,000 for older business owners. Retirement plans can offer various benefits not only for you, but also for your employees. Visit with a financial professional to determine the benefits of different kinds of plans and what might make sense for your situation to save for retirement and save on taxes where you can.
Get the Right Insurance to Protect your Business
We understand more than anybody that keeping expenses low for your business is a smart decision. Insurance is one necessary expense you don’t want to skip. Think of it this way: if something were to happen to you, what would happen to your business? Nobody likes to think about the bad stuff – like what could happen in the event of your death, a serious illness, or disability. What would you do? If you lose your income, you want your personal and business assets to be protected from disaster, as well as provision for any dependents. Personal life and disability insurance policies can do this for you. This is an often-overlooked, essential part of preserving your business’ greatest asset – YOU!
Check-in and Be Realistic
Do you have a budget for your personal finances? Do you know where your money goes and what you do with any excess? Think about your business in the same manner. Paying attention to where the money is going takes time, but you’d be surprised what trends you can spot. Does your business have a “rainy” season? How can you appropriate funds accordingly when you have booming months? What goals have you accomplished? How do your expenses compare to your revenue? Where could you do better? One of the most common challenges for business owners is variable income. Taking the time to check in and smooth out your cash flow is essential. Be realistic about the state of your business and where it’s headed – even better if you can involve your finance professional in a regular “check-in.”
Checking in could also mean renegotiating rates with vendors – even think about your interest rates and various fees you pay for credit card processing or other services. Just as you would revisit your insurance rates for your personal finances, regularly look at renegotiating your rates for routine operations to find ways to save and keep expenses low.
Find Smart Ways to Save Time
Efficiency is key to a successful business. Do you spend time doing administrative tasks like payroll and paying bills? Automate these things! You can still take the time to review and make payments appropriately while avoiding late fees. Know your worth for every hour you spend on your work. If you spend time managing the finances of your business and trying to figure out how to pay your taxes, would you be more profitable spending that time elsewhere? If so, hire a professional to take care of the financials.
Have a Succession Plan
Someday, you’ll want to retire. Hopefully you’ll be able to do that earlier rather than later if you have the desire to do so. What’s going to happen to all of your hard work? The clientele or customers you’ve built over the years? Your employees? You don’t want your business to shut down just because you leave. Plan for a strong succession to ensure that your financial interests are at the forefront, whether you decide to sell your business, pass it on to a family member, or even if you decide to close up shop and walk away. Each of these options comes with various cons and pros, so be sure to talk to a team with an attorney and financial advisor who has experience to help you evaluate appropriately.