Becoming an entrepreneur is associated with living a high-risk, high-reward lifestyle. However, minimizing risk through strategic planning and careful financial management is essential for long-term success.
Unfortunately, most entrepreneurs have in-depth knowledge in their chosen area of expertise, not in the nuances of actually running a business.
Managing your finances is essential for success as an entrepreneur; everything else you can learn along the way. Here are the top ten financial management tips for entrepreneurs and business owners.
Create Separation Between Accounts
One of the first things people will tell you when you start a business is that you need separate bank accounts for personal and business endeavors. The importance of this separation may not be readily apparent when you start on your business ownership journey.
However, it will become evident once your business takes off and you catch the attention of the IRS.
Many entrepreneurs believe that keeping one set of bank accounts is easier than having separate accounts.
While you won’t have the inconvenience of carrying different cards and moving money around, this separation will pay dividends later on.
If you have separate accounts, it could be the difference between paying fines on purchases you can’t prove as related to your business.
Furthermore, keeping your business finances separate will give you the resources you need to build your business credit score and secure funding without putting your personal finances at risk.
So what happens when you need to infuse your startup with cash from your personal accounts? You simply transfer it and record it as an owner contribution or loan. It’s that easy. When in doubt, have an accountant walk you through it.
Implement A Smart Financial Management System
Creating a clear, smart financial management system for yourself and your business will help you stay organized and intentional with your finances. Clarify how you’ll allocate profits from your business.
For example, you’ll need to set aside a certain amount for taxes and owner pay, but what about reinvesting in the company?
Clarifying your percentage breakdown of each dollar that comes into your business will create a framework that’s easy to understand and follow, rather than leaving things to chance. Consider using automation and account separation to improve this process.
To help you determine which system is right for your business, you can compare ERP software solutions that automate processes and provide analytics and reporting tools, allowing you to track and analyze real-time financial data. By comparing the features of different solutions, you can find the one that perfectly fits your needs.
Plan For Retirement
Many entrepreneurs tend to overlook the retirement planning process. However, the sooner you start, the better.
It can be hard to picture a future in which you sell your business or shut it down, but that’s a reality you’ll someday face.
Consider talking to a financial advisor and putting a retirement savings plan in place. While you’ll lack the advantage of an employer-backed plan, many retirement programs offer tax-advantaged savings to help you minimize your annual contributions.
Set Short And Long-Term Goals
It’s essential to have financial goals to strive toward as an entrepreneur, both personal and business-related.
Outline your short and long-term goals for your business finances. Think beyond profits and consider savings, reinvesting, and growth.
When considering your short and long-term personal finance goals, be quantitative. Perhaps your first goal is to create a retirement savings fund, then pay down personal debt.
Create a structure and strategy for accomplishing these goals, then reverse engineer them to devise an action plan.
Have An Emergency Savings Plan
The importance of both a personal and business emergency savings plan cannot be understated in these tumultuous times.
The first goal to strive for is saving a month’s worth of personal and business income for emergencies. Then, try to scale up to three months’ worth.
Monitor And Improve Credit Scores
Establishing a business credit score is essential for long-term growth and success. Many entrepreneurs are remiss in not starting to develop a credit score during the early days of their operation. By the time a loan or credit history is required, it’s too late.
Start by getting a small business loan and paying it back on time to start generating a credit history. You can also work with vendors who offer credit, as well as utility providers who report credit history to the bureaus.
Set aside time each month to look at your business credit report and see if there’s room for improvement.
Having a perfect credit score isn’t feasible for most entrepreneurs, but aiming for a good rating will be beneficial in the long run.
Review And Refresh Accounts
Many people go find a bank account that suits their needs and stick with it until a disruption forces them to change. As long as the status quo is in place, there’s no need to change anything, is there?
The options available to your business will evolve and grow with your business. As such, the accounts you chose during the early days may no longer be the best option.
Taking some time to review and refresh your account options could save you thousands in interest and fees over time.
Remember, the only thing the status quo gets you is more of the same; nothing changes if nothing changes.
Understand Frugality VS. Cheapness
As an entrepreneur, it’s essential to know when to spend and when to save. This is the essence of knowing the difference between frugality and cheapness. When you’re frugal, you purchase things you need.
You do research, validate your choice, and invest in quality. In fact, a frugal person might pay more for something than a cheap person because they know the value.
While frugal entrepreneurs aren’t afraid to invest in quality, they know the difference between a need and a want and often take a scaling approach to business expenses. For example, leveraging free tools until demand or opportunity cost validates the need for paid tools.
Alternatively, a frugal entrepreneur might purchase a reliable yet nice used car rather than a luxury vehicle that “looks” successful.
Frugality will lead to long-term financial success; cheapness will not.
Become A Bootstrapper
Before you go to the bank for a loan or swipe your credit card, explore all of the financing options available to you for scaling your business. Channel your inner bootstrapper and find other ways to acquire financing for your future endeavors.
For example, can you save up the money using your profit margin? Can you create a crowdsourcing campaign?
The less you naturally rely on business credit, the less you’ll struggle with financial management.
Leverage The Experts
Finally, be willing to admit when you don’t know something. If you have 20 years of experience in engineering and design that helps you create a profitable product, then you likely don’t understand the nuances of financial accounting and taxation— and that’s ok. There are experts who can help you. Accept the help.
By following these financial management strategies, you can improve the longevity and success of your business while positively impacting your personal finances.