Looking to start a business in the new year?
Once you have your incredible idea, you want to secure a financial plan that helps you reach your goals. Here are five must-have financial tips new entrepreneurs will want to know.
1. Keep Business and Personal Money Separate.
You can avoid countless headaches, sleepless nights, and restless days by creating a robust plan for your business from the start.
Step 1 is to separate your business and personal finances. Gone are the days of putting business lunches on a personal credit card or booking company trips to boost your travel points.
While you may suffer short-term conveniences, having your business and personal money separate will pay dividends in the long run. Keeping the books above board will be much more streamlined as your business gains momentum and becomes more profitable. Below are a few specific tips to help maintain this critical separation:
Open a business bank account, credit card, etc.
Be diligent about bookkeeping and tracking your income, expenses, and receipts. You can look into a bookkeeper, accountant, etc., or utilize a tool like Quicken.
Pay yourself a salary to bring consistency to monthly spending, saving, and investing.
Creating a unique business finance system isn’t only convenient, it’s also critical for taxes and liability. Come tax time, you won’t have to worry about which expenses were for the company and which were on your dime. Clear documentation makes the process much more efficient and may also open you up to unique tax deductions for business owners you wouldn’t otherwise be able to access.
Additionally, giving business and personal dollars their own space can also help you protect yourself from personal liability. If someone sued your company, your personal bank account wouldn’t be on the line. To further protect yourself, you’ll want to select the most appropriate business entity (more on that later).
2. Build A Steady And Flexible Cash Flow Plan.
With a business, you have to plan for two: yourself and your company. That idea extends to your cash flow plan. Building a cash flow plan that works for your business and your life is especially critical in the early years, where profit margins tend to be slimmer.
You want to be as lean and flexible as possible when you first start out. Doing so will help provide necessary buffers and a longer runway for your company. How can you create a cash flow plan that works?
Understand the differences between your wants and needs. Even a basic exercise like this can help you prioritize your expenses and scale back where possible.
Additionally, you’ll want to know:
All of your planned expenses. For your business, that might be a website (domain, design, maintenance), required technology, staff, outsourcing costs, etc.
Your plan to cover them. Knowing your costs can help provide a baseline for pricing strategy, sales tactics, workflows, etc.
As a business owner and the person responsible for steering the ship, don’t be afraid to make changes as needed. Be nimble and willing to shift spending priorities as the business grows and evolves.
While you may be hyper-focused on increasing profit the first few years, don’t be afraid to reinvest some of the profits into the business to support its growth, whether that be on talent, benefits, marketing, training, etc.
3. Create A Strong Risk Management Plan.
When you are self-employed, you’ll encounter several risks. From a financial planning perspective, you want to cover your risk in the following ways:
When it comes to liability protection, you’ll have to choose the most appropriate legal business entity. Several options include a sole proprietorship, general partnership, limited partnership, limited liability corporation (LLC), S-Corporation, C-Corporation, etc.
Each comes with its advantages and disadvantages, ranging from levels of liability protection. Your business structure will also determine how the business (income and losses) will be taxed. We’d love to review your options together!
Insurance is one of those financial tools you hope you never have to use. But in case you do, it’s vital to keep your bases covered. You’ll want to maintain proper insurance on an individual and business level.
While every person and their needs are different, many people benefit from life insurance (financial protection for loved ones if you pass away) and disability insurance (income protection should you be unable to work).
You’ll also need to obtain the proper business insurance depending on your size and industry. Doing so will help mitigate risks that are specific to the type of business you are running.
4. Plan For Speed Bumps Along The Way.
The entrepreneurial journey is many things—rewarding, innovative, exhilarating, challenging, fulfilling—but it certainly isn’t easy.
There will undoubtedly be challenging periods, and you want to plan for them properly. Even businesses need a healthy emergency fund to keep the lights on if profits fall for a season or two.
A good rule-of-thumb is to have anywhere from 3-6 months of fixed expenses available in liquid assets.
5. Invest For Your Future.
Retirement saving is tough for entrepreneurs, so it’s essential to construct a plan from the start.
First, know your options. Below are the more common retirement plan account types for self-employed people:
Traditional or Roth IRA
Owner-Only 401(k) or Solo 401(k)
Defined Benefit Pension Plan (less common)
Cash flow may be tight when you first open your doors. On top of limited resources, your main priority may be to divert as much capital as possible toward your venture. As a result, it’s far too easy to de-prioritize what you could save into any retirement plan account. It’s okay for your retirement savings to ebb and flow a bit.
However, you still want to look at your cash flow and allocate what you know you can contribute each month. As profits increase, aim to add more into your retirement accounts, for example.
Once your retirement savings are all set, you’ll also want to look towards other types of investments. Doing so can help you diversify away from your business and ultimately bring more financial flexibility. How can you diversify? Depending on your situation, you may consider real estate, brokerage accounts (or taxable accounts), private equity, etc.
Set Goals That Inspire You
We recently wrote about why visualizing retirement is so important for small business owners.
In that article, we dove into SMART Goals and several other important topics for small business owners. Creating SMART Goals is critical for any financial plan, especially for new business owners. However, to take it a step further, you also want to make sure that you set goals that truly inspire you.
When you do this, you live out your “why” day in and day out. Keeping your “why” at the center of your plan can help you push through a bad day or when you think your goals are too far out of reach.
Take the time to set business and personal goals. Ask yourself these questions:
What are you most excited about pursuing?
How can your resources help you get there?
What are your values, and how are your current financial decisions supporting them?
When you take the time to set goals that inspire you, it will be hard to lose sight of your long-term vision.
We Can Help
If you are an entrepreneur, we want to help make sure that you secure your financial future. Learn more about how we can help you today through financial planning for family businesses! Please contact us for more information.
Craig Toberman is the Founder of Toberman Wealth – a fee-only financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.