Profitability and the bottom line can make or break a small business. Finding success in a chosen market takes time. There are pitfalls to avoid and pathways to choose along the way. Learning how to better manage wealth can make a huge difference to a savvy small business owner on the journey to meeting personal and professional goals.
The wide range of personal finance tips and tools can make it even more important to be strategic about how small business owners weigh their growth expectations against sound advice. When you know how to keep those personal finances in shape, you put yourself in better position to support growth down the road.
- Find the Experts
Small business owners can fail if they make poor decisions without getting all the facts. A small network of contacts is really all you need. Seek out the key contacts: a lawyer, accountant, and tax advisor. With these three indispensable professionals at your fingertips, you are more likely to keep your business and personal finances in order now and in the future.
- Give Yourself a Break
Tax codes have changed that made many small businesses eligible for a 20% pass-through deduction. Tax professionals can advise on taxes, without overpaying. Look into tax-advantaged retirement plans like an IRA and self-employed 401 (k)s.
- Get Paid
Don’t make the mistake many small business owners make of not paying yourself first. Oftentimes, small business owners want to reinvest money back into the business. Do not invest all personal capital into a business. Look into saving approximately 10-20% of your gross income for long-term goals.
- Get Liquidity
Long-term survival is about planning for the unknown. As you grow your small business, it is beneficial to keep 6 to 12 months of expenses in liquid reserves. Make sure there are plans and protections like health and disability insurance. Whole life insurance is not a bad idea, either, in case you need to borrow against it in the future. The likelihood may seem low now, yet anything can happen. It is better to be prepared.
- Know Your Successor
The biggest asset a small business owner has is the business itself. Small business owners often have a dreamy vision of being the only owner (ever) of the business. To effectively manage personal wealth, it takes prioritization to implement a succession plan in the event of unexpected circumstances or when it is time to go.
- Watch Excess Capital
Diversification of your portfolio investments is critical to success. Too much excess cash can impact capital diversification. Investment professionals can advise about diversifying the risk profile of investments so that they vary and protect assets from the market shifts.
- Build Good Habits
Even when focused on building systems that are efficient, good habits can be just as (if not more) effective for the long term. Once money is put aside for retirement or outside investments, don’t pull it back into the business. To build wealth means investing wisely in personal and professional finances.
- Be Prepared
Future cash flow disruptions can pop up at any time. It may happen before launching the business, right as you get started, or sometime down the road. To be successful, small business owners need to prepare for rough spots on the journey. Prepare to have enough cashflow available to pay household bills in the early years (first five). Successful owners usually keep around three years’ worth of expenses in cash and work part-time at the business while working elsewhere to keep things moving forward without being cash strapped.
- Keep Personal Finances Separate
Personal and business finances should not mix. Betting too much on a business can put owners at a disadvantage when things hit a low point. Inappropriate risk is dangerous because a small business can take everything under. Personal savings are for family, so only tap into them as a last resort with the advice of wise financial and legal counsel.
- Take Care of Personal Finances
It may feel like personal and business finances are poor bedfellows, but the opposite is true. They are intricately knit together when you own a small business. Be sure to invest the same amount of time caring for personal savings, retirement accounts, and investments. Manage expenses to increase savings and investments to create more stability in personal finances.