Financial planning is important for everyone, whether you own a business or not, but did you realize that financial planning for entrepreneurs is different?
It’s also more difficult. Why?
In the early stages of a new business, planning is focused on the business and how to improve cash flow. Personal financial planning isn’t usually something people worry about.
However, once the business is up and running you should have a plan in place. Let’s talk about how planning is different for an entrepreneur.
[Related: Insight from Influential Entrepreneurs]
Tax Planning
There are a few options regarding tax reduction. You will have to make many decisions that will affect your tax bill. For example, should you offer an employee-sponsored retirement plan? What type? These choices will determine how much income can be sheltered from taxes.
Similarly, how you choose to compensate yourself, whether through wages or profit distributions, will impact the amount of Social Security and Medicare Tax you pay.
Finally, what you write off as business expenses impacts taxes as well. However, this is not as important as many first-time business owners believe.
Choosing Benefits
When you work for an employer, you often have many benefits including healthcare and retirement. Most employers also offer group life and disability insurance.
As the employer, it is now your responsibility to choose which benefits to offer your employees. Also, federal law requires that you offer your employees the same types of benefits that you receive through your business.
If you do not have benefits through your company, we highly suggest purchasing them on your own.
[Related: Investment Help]
Risk Management
A start up is risky. Personal cash flow is negative, and you will probably end up personally funding the venture in many instances.
Furthermore, the debt accrued adds to the risk. However, once the business is running and cash flow reaches the desired level, being an entrepreneur may actually be safer than being an employee. Let me explain.
As an entrepreneur, you have many customers and a small risk of your revenue suddenly dropping to zero. But, as an employee, your employer is your only customer.
You are paid for doing your job, but your chance of losing all revenue is much higher. Consequently, business owners generally need a much smaller emergency fund than people who work for an employer.
Exit Strategy
One of the biggest incentives for an entrepreneur is the payoff from selling their business.
This payoff is usually a large part of their financial plan, although some entrepreneurs can save enough while running their business to meet their financial goals.
In this case, the payoff can open many doors for the entrepreneur.
[Related: Retirement Budget Tips]
Achieving Your Financial Goals
It can take time for a startup to make progress and during this time, the various unknowns can make it difficult to plan for your personal financial future.
However, as soon as things settle and you can begin financial planning, do so. It is essential in helping you understand how to use the success of your business to achieve your personal financial goals.
Conclusion
Becoming an entrepreneur is the dream of many people. Being your own boss, doing something you love, and retiring early are all great benefits to owning your own business.
However, do not get so caught up in living the dream that you forget to plan for your personal financial goals.
It is never too late (or too early) to start planning. Contact us today and let us help you achieve your goals!
