As an entrepreneur, it tends to be a point of pride to see dreams turn into profits. However, the path from dream to reality has a lot of bumps and hurdles and they need to be recognized before they have to be overcome. Nowhere is this more pronounced than with finances.
With the tremendous amount of personal finance information available, sometimes it can be a little difficult to figure out what advice is best for small business owners. Ann Puig, Costa Rica’s leading businesswoman and entrepreneur, shares some of her prime tips to manage wealth in a business.
Entrepreneurs frequently come up short since they settle on choices without discovering the facts from specialists. Puig explains, “Create a small network of important contacts that are always readily available. For example, you can search for an attorney, a bookkeeper and a tax advisor. Make sure you stay in touch with them from time to time so that you can call on them when necessary.”
It can also be beneficial to not hold excess capital in the company. Diversify the capital and let it work for you. Investing in something that offers a risk profile different from the entrepreneur’s core business can be especially rewarding.
Diversification of capital doesn’t mean liquefying all extra funds. “The business has to be prepared to weather a storm, which will undoubtedly come at some point or another,” says Puig. “If possible, try to keep between six to 12 months of expenses in liquid reserves at any time.” Additionally ensure you have the correct insurances, such as disability and health insurance, and plans set up for those extreme eventualities that everyone hopes never come.
Tax codes change on a regular basis and it can sometimes be difficult to keep up. Always consult with a tax professional to ensure the business isn’t paying more than it has to. Incorporate tax-advantaged retirement plans, such as 401(K) and IRAs, into the company to provide an extra cushion.
The same way a business owner dissects income statements, balance sheets and cash flow projections, the same can be done for personal finances. As Puig points out, “You can deal with your expenses to expand your reserves and investments in retirement accounts and other resources in order to create stability in your own life. Not accurately addressing personal finances can result in problems for the business.”
Pay yourself first. Ordinarily, entrepreneurs believe that they to reinvest all their cash into the business. You might think you’ll profit than in stock markets; however, this is shortsighted. Save between 10-20% of the gross income for long-term goals and invest the rest.
Get ready for future income interruptions three years before launching a business. Successful entrepreneurs and seasoned business owners prepare for the turbulent times of the company’s launch. Create plans to make sure that there will be enough resources to keep the business afloat while it is being built. Says Puig, “Successful entrepreneurs typically set aside three years’ worth of living expenses before starting the business. Even then, the business is launched as only a part-time effort until things get going, giving the owners the ability to continue receiving an income from their steady jobs.”
For some entrepreneurs, the largest asset on the balance sheet is the business itself. There is rarely a formal succession plan, which can lead to a “what now?” scenario down the road. Put more attention to creating a proper succession plan and less emphasis on making investments that may or may not provide rewards.
Similarly, as you center around building effective frameworks in your business, focus also needs to be given to forming good habits with personal wealth management. “Once money is set aside, it should be untouchable. This requires discipline and dedication, but so does running a successful business,” says Puig.
Lastly, business and personal finances need to be kept separate. Personal savings need to be used for the home and taking out of them is depriving the family of something. Asserts Puig, “If you establish a complete financial plan before launching the business, you more than likely won’t run into a situation that required you to take your personal savings and apply them to the business.”