Being an entrepreneur is an exhilarating journey filled with opportunities, challenges, and the freedom to turn your vision into reality. However, to navigate this path successfully, one essential tool is often overlooked: effective personal financial planning. Whether you’re just starting your entrepreneurial journey or a seasoned business owner, a robust personal financial plan is the key to thriving. In this blog, we’ll explore the crucial aspects of financial planning that every entrepreneur should consider.
What is financial planning for entrepreneurs?
Financial planning for entrepreneurs involves setting personal financial goals, creating strategies to achieve those goals, and developing a roadmap for managing the financial aspects of a business. Some of these financial aspects include budgeting, cash flow management, and investment planning.
It’s a dynamic and ongoing process that helps entrepreneurs make informed decisions, allocate resources effectively, and navigate the financial complexities of running a business.
Why is financial planning important for entrepreneurs?
Developing a financial plan can help entrepreneurs grow their businesses, manage cash flow, and maintain financial stability during any challenging times. A financial plan provides a roadmap for managing the financial aspects of the business. It’s an essential component of entrepreneurship that requires careful consideration and strategic thinking.
What are 7 essential financial planning tips that every entrepreneur should know?
- Set clear financial goals
Setting clear financial goals is crucial for entrepreneurs. They provide direction and focus for their business efforts. While it’s important to aim high, it’s important that your goals are Specific, Measurable, Achievable, Relevant, and Time-bound (SMART). Setting unrealistic goals can result in frustration and disappointment.
- What are my short-term and long-term financial goals?
- How much capital do I need to start and sustain my business?
- When do I want to achieve specific financial milestones?
These goals will serve as your roadmap, helping you make informed decisions and stay focused on what truly matters. Remember financial goals are not set in stone. They should be adjusted as your circumstances change. It’s important to regularly revisit and refine your goals to stay aligned with your business’s evolving needs and priorities.
- Create a detailed budget
Creating a detailed budget is essential for managing your business finances effectively. It allows you to track income, expenses, and cash flow. Be meticulous when estimating costs and don’t forget to account for unexpected expenses. Your budget should cover operational costs, marketing expenses, salaries, and any loan repayments.
- Build an emergency fund
Entrepreneurship can be unpredictable. Economic downturns, unexpected setbacks, or slow periods can all impact your cash flow. An emergency fund that can cover several months’ worth of expenses will help provide a safety net during any challenging times and reduce financial stress. If you don’t have an emergency fund, you may have to take on debt or make other financial sacrifices that may harm your business in the long run.
For example, during COVID, many businesses had to close because they didn’t have a financial safety net to fall back on. However, those businesses that had contingency funds had the time to adapt to the new marketplace and survive until business activity picked up again.
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- Keep your business and personal finances separate:
Entrepreneurs often mix their personal and business finances. To have more clarity, open a separate business bank account. This will make tracking income, expenses, and taxes easier, ensuring that your business remains financially healthy. It will also minimize potential complications associated with commingling personal and business finances.
- Invest wisely and save for retirement
Focusing on your business is essential but it’s also important to think about your personal finances. Ensuring a smooth transition and securing your financial future is as vital as managing your day-to-day finances. You may want to consider investing in a retirement plan, such as a SEP IRA, a Solo 401(k), or a regular 401(k); depending on what’s right for you. By doing this, you will be able to build a secure financial future in conjunction with your business endeavors.
6. Make the best use of tax-saving strategies
Entrepreneurs have access to several tax-saving opportunities that non-entrepreneurs do not. Planning your taxes effectively can help minimize your tax liability and maximize your after-tax profits. Tracking business expenses carefully and ensuring that all business-related expenses are accounted for can help entrepreneurs capitalize on this opportunity.
7. Manage debt strategically
Debt can be a powerful tool for growing your business, but it should be managed strategically. Understanding your debt is crucial to managing it effectively. This includes the loan interest rate, repayment terms, and total balance owed. It is important to pay off high-interest debt first, while still making minimum payments on your other debts.
It’s also important to not accumulate excessive debt that could burden your business in the long run. Debt reduction options include negotiating with creditors for better terms or consolidating several debts into a single loan at a lower interest rate.
Keep your debt from becoming a burden and use it to grow your business by managing it effectively.
Seeking professional guidance as an entrepreneur
Business owners have a lot on their plates. To reduce some of that stress, it may be helpful to seek advice from financial professionals, such as financial advisors or accountants, who specialize in working with entrepreneurs. Entrepreneurs have unique needs and face different challenges compared to individuals employed by a company. They can provide valuable insights and help you make informed financial decisions.
What are some reasons an entrepreneur should work with a financial planner?
- Sounding board: You likely spend a lot of time making big decisions about your business. A financial planner can be an objective sounding board for your business and personal finances.
- Many financial planners are entrepreneurs themselves: Find a fellow entrepreneur – a financial planner who owns and runs their own business. Working with someone who has grown their business and worked with other entrepreneurs, will understand your needs better than an employee at a large firm.
- Make sure your money is in the right place: Your financial planner will review your existing accounts and investments to make sure your money is in the right place. This will help minimize costs and make sure that your asset spread aligns with your risk tolerance and financial goals.
- Help you plan for the worst-case scenario: Unexpected events are never easy to imagine, but planning for them is essential. An experienced fee-only financial planner will take care of this for you.
- Help free up your time: As an entrepreneur, you probably have a busy schedule and juggle multiple responsibilities. A fee-only financial planner can save time by handling the intricacies of financial planning, allowing entrepreneurs to focus on core business activities.
- Peace of mind: Knowing that a qualified professional is overseeing your financial affairs can provide entrepreneurs with peace of mind. This assurance allows them to focus on business growth and innovation without undue stress about financial matters.
Working with a fee-only financial planner can provide entrepreneurs with the expertise, time savings, and comprehensive planning needed to navigate the complexities of both personal and business finances.
How often should I review my financial plan as an entrepreneur?
As an entrepreneur, it’s important to regularly review and update your financial plan to ensure it remains aligned with your business goals and the changing economic environment.
Regular reviews help you identify potential issues early on and make informed decisions to keep your business financially healthy. We generally recommend reviewing your financial plan at least once a quarter. By monitoring progress and adjusting your financial plan as needed, you’ll be able to stay on track.
We asked our community a couple of questions and below are my answers to the questions they asked:
1. What are some of the most common challenges you see among the entrepreneurs you work with?
In my experience, the three biggest challenges that entrepreneurs face are:
1) determining if you indeed have a profitable business,
2) clearly separating work and your personal life, and
3) neglecting one’s personal finances.
Running a business is risky and time-consuming. You need to know if this is truly worth all your effort. If you’re a solopreneur, it typically makes financial sense to continue this path if the money you’re taking home is close to or more than what you can get as an employee.
Once you have employees, you need to start calculating your profit margins. Experts argue that your minimum profit margin target should be 10%. If it’s consistently below that, it may not be worth your time. You need to make sure you’re paying yourself the market wage when computing your profit margin.
The second biggest challenge that entrepreneurs face is being able to achieve the right work/life balance. As a business owner, you’re constantly thinking about how to run your business better. You may be on a hike with your spouse, and a business idea will come to you. It’s tempting to work weekends and weeknights. There is a true risk of burnout.
The third biggest challenge is how to nurture your personal finances while growing your business. As an entrepreneur, your personal finance might be the last thing you’ll be thinking of. Business owners actually have a lot of opportunities to grow their personal wealth in a tax-advantaged manner.
2. How do you help entrepreneurs overcome these challenges?
Join a community of entrepreneurs who can help you learn how to run a business more effectively. I joined an accelerator program in Washington, DC called Entrepreneurly. It’s been extremely helpful for me. You can join the Entrepreneur’s Organization, which is a global community of business owners helping each other reach their full potential.
As an entrepreneur, you understand the value of hiring an expert. To maximize your unique situation as a small business owner, work with a fiduciary financial planner who can help build your personal wealth as you grow your business.
3. For entrepreneurs who are unsure whether or not they should hire a financial advisor, what would you suggest they consider to help them make a more informed and educated decision?
I have met successful entrepreneurs who have built a $5 million business, but neglected to save money through a 401(k) or IRA, missing out on potential several thousand dollars of tax-advantaged growth.
You essentially have three choices: 1) postpone nurturing your personal finances until you retire, 2) dedicate at least 200 hours to learning how to manage your money well, or 3) hire an expert.
The first choice will likely cost you several tens of thousands of dollars in missed opportunities. The second works if you have the time and energy to learn on your own.
The third choice is best, if you find the right fiduciary financial planner who is experienced with small business owners. Look for fiduciary planners via the XY Planning Network or NAPFA. One study showed that those who worked with a financial planner and had a comprehensive financial plan in place built up to four times more wealth than those with no plan.
4. As an entrepreneur yourself, how does your own experience running a business benefit the business owner clients you serve?
As a fellow entrepreneur, I have wrestled with a lot of questions you probably are struggling with now. Should I get taxed as an S-Corp? What do I do with the cash that’s sitting in my business checking account? How much do I pay myself? How can I establish a retirement plan? How can I lower my taxes?
I constantly look for ways to maximize my money as a business owner. For example, I was recently researching the best place to store excess cash in the business. I looked into opening a business savings account (not very many good options, but I did find a decent one), a brokerage account, or doing a distribution and keeping it in a personal savings or brokerage account.
We are able to share with our clients all the ways I have learned about how to maximize my money as a small business owner.
Effective financial planning is crucial for achieving success as an entrepreneur.
By setting clear goals, creating a solid budget, and managing your finances strategically, you won’t just survive during hard times, but also thrive and achieve your business dreams. Remember that financial planning is not a one-time task but an ongoing process that evolves with your business. With the right financial foundation, you can build a prosperous and sustainable business.
If you are interested in a comprehensive financial plan, schedule a free discovery call with one of our fee-only financial advisors today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.