Owning your own small business can come with a lot of freedom that being an employee can’t provide you. Unfortunately, being a small business owner can also create additional responsibilities, uncertainties, and stress.
Small business owners can have a much more difficult time staying on top of their finances. Whether it’s inconsistent cash flow, taxes, employee turnover, or focusing on business growth, there is a lot to contend with. But that doesn’t mean it has to feel like a permanent weight on your shoulders.
Along with being a small business ourselves, we are also lucky to work with many successful business owners who have learned to manage the complexities of owning a small business by having a plan in place for these challenges.
We’ve drawn upon this collective wealth of insight to outline 3 key secrets to financial success as a small business owner, to help you feel empowered with your own finances so you can focus on running a successful business.
#1. Understand Your Cash Flow
Having an accurate picture of where your cash flow is now and where you’d like it to be is a crucial first step to relieving stress associated with cash flow.
Unlike W2 employees, who can rely on a predictable amount of money on a regular basis, your cash flow as a business owner might be unpredictable. Without a consistent income, it can be difficult to manage your cash flow, both for your business and personal life. In fact, according to a cash flow report from QuickBooks, 80% of small business owners feel stressed about their company’s cash flow.
You can’t force your income to be predictable, but you can have a plan that allows you to work around this without jeopardizing other areas of your financial plan.
Creating or revisiting your budget regularly is important to get an idea of what your income and expenses are like. While I love YNAB (You Need a Budget) for very detailed budgeting (we’re talking EVERY penny is accounted for!), it’s not necessary to get this “in the weeds” to get an idea of where you stand today.
We use a financial planning tool in our client portal to help us look at each client’s current cash flow without them having to do the tedious work of accounting for every penny they spend. This enables us to determine what your average income and expenses have been over time, and together we can estimate what your income and expenses could look like in the future.
#2. Understand Your Risk Tolerance
It’s important to review your goals and risk tolerance regularly considering that your business might be a large undiversified portion of your financial assets.
How much financial risk can you afford to take? Risk and return are intricately tied together. As a business owner, you risk losing significant amounts of your money and time if your business is unsuccessful. But hopefully, you get rewarded with an appropriate return for having taken that risk.
We see many business owners who experience larger returns by selling their business than a salaried employee can get by saving a percentage of income over their working years. That’s one way that the risk of owning your business could pay off, but it is by no means a guarantee (or a desire for some business owners).
Everyone hopes their business doesn’t fail, but it’s our job as financial planners to consider all potential outcomes. Many business owners have a lot of their net worth tied up in their business. Owning your own business can create a lack of diversification when you reinvest all the money from your business back into your business.
Of course, when your business is growing or starting up, this can be a necessity. Investing back into your business will hopefully pay off, but you are also running the risk that it doesn’t. One way to diversify is by investing some of the cash from your business into the stock market.
As your business matures, it can be helpful to redirect some of the business’s cash flow and invest that in the stock market in a diversified way. In doing so, your money is put to work investing in lots of businesses instead of just your own.
#3. Save for Retirement
Data from SCORE shows that 34% of small business owner’s don’t have a retirement savings plan for themselves and 40% of owners are not confident they’ll be able to retire by age 65.
Focusing all your energy and money on growth makes sense. You can’t save for retirement if your business isn’t successful. Feeling comfortable enough to save for retirement is a dichotomy most business owners face. In reality, business owners never do and never should feel “comfortable,” but saving for retirement must be part of your business plan.
As an owner of a small business, your focus is to ensure its long-term success. Often that’s to the detriment of your retirement savings. And while there’s no retirement plan for business owners to simply opt into, there are plenty of different retirement savings accounts for you to utilize.
In fact, the options and flexibility of small business retirement plans are a significant bonus of being an owner. We’ve put together a comprehensive overview of them all for you to download and save as a useful reference tool. You can access your copy here.
We can help you determine if it makes sense for your business to open a retirement account, and which option(s) are best for your specific business so that you can feel confident in your retirement plan, whatever that may look like for you.
Bonus Secret: Work with a Professional Guide
We know what it takes to build a business, watch it grow, and then channel your income to help future proof your finances. If you’d like a professional guide to help you navigate the unique financial path of a small business owner, please don’t hesitate to contact us.
As a team who truly understands your challenges, we’re perfectly positioned to help you unravel your current financial situation, and build a plan that supports your growth, both personally and professionally.
Our goal is to ensure you feel empowered in your financial decision making. By helping you analyze the most beneficial retirement savings and tax-efficient options for your business, you can relax knowing that your business finances are well taken care of, and your future is well provided for.