A lot of people fail to plan. This is because they think they don’t have enough – enough variable income or are currently investing in a business, waiting for it to produce a sizeable income. As such, financial planning during the early stages of entrepreneurial venturing tends to be more invested towards running the business and increasing business cash flow, rather than personal financial planning. However, this shouldn’t stop you from having some personal financial goals as well.
So, why is it so important to think beyond your primary entrepreneurial venture?
Entrepreneurs have an unstable income
Profitability can sometimes be erratic – increasing and decreasing at irregular intervals – making it hard to predict and manage personal finance. As such, you’ll need to work really hard to ensure that your income is as predictable and as smooth as possible. This way you can be able to pay yourself at least a competitive market rate for your role.
Financial planning provides lifestyle stability
Planning and managing your personal finance can help provide you with greater lifestyle stability. Thereby reducing the stress around money i.e. debt, unexpected expenses and more. A stable life can be a source of great confidence and productivity for entrepreneurs.
Helps you prepare for the worst
In business, as in life, one needs to be realistic. The failure rate of new business is quite high even though you have great ideas and a good team to execute, you can still end up without a source of income. So combine this stress and the fact that you might have to take on debt and risk to start the business. You could be left in a very compromising position. Preparing your personal finances to cater for the worse case scenarios can guard you against such eventuality.
Take advantage of amazing payoffs
Financial planning for entrepreneurs, though difficult, can yield tremendous payoffs, if a financial plan is in place to actualize. For entrepreneurs, it is possible to retire years before what is considered normal retirement, start another business or even work on things that you are passionate about.
Financial Planning For Entrepreneurs
Since entrepreneurs are compensated different i.e. via wages or profit distribution, this impacts their financial risk, tax, pension and more. Here are five (5) ways in which financial planning for entrepreneurs is different:
I. Risk Profile
Risk is inherent in entrepreneurship, particularly at the starting phase as personal cash flow tends to be negative. In many instances as you might be funding your business personally or through debt which you have guaranteed to get things going. However, as the business stabilizes with a steady income, being an entrepreneur becomes less risky compared to being an employee.
For entrepreneurs, this means that they need a smaller emergency fund than a typical employee with similar compensation.
II. Taxation
When it comes to tax planning, entrepreneurs have a number of options. As the owner of the business, you will need to make a few decisions that will have an impact on your tax bill. Things to consider are:
- They type of business which determines how tax is paid
- Whether or not you’ll have an employee-sponsored retirement plan that determines how much income will be tax-sheltered.
- Type of self-compensation you will have i.e. salary or profit distribution
- The treatment of what you can write off as a business expense.
III. Choice of Benefits
Unlike a typical employee, you have the choice of benefits you want to have in terms of health care, retirement plans, disability insurance, life insurance – the full array. All these things will seriously impact your personal financial plan since it’s either you get them through the company or you purchase them on your own.
IV. Exit Strategy
For many entrepreneurs, a primary motivation to grow their ventures is the payoff they expect to net from the business upon their exit. This payoff is the key factor in the financial plan and needs to seriously needs to be considered when drafting a financial plan. A payoff on the sale of the business can really change your outlook and present you with new opportunities you previously never thought possible.
Achieving It All
I am aware of my personal experience that it takes time for things to materialize and the business to move in a clear direction. Therefore, it becomes very difficult to construct a financial plan or even make personal financial goals. However, still, make those plans, don’t beat yourself up for not reaching them simply adjust and be flexible. Financial planning is extremely important for entrepreneurs as it helps clarify and translate one’s business success into attainment of personal financial goals.
Image credits: Top by Polina Zimmerman from Pexels
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