Financial Planning for Entrepreneurs

The number of entrepreneurs in America has exponentially increased over the past few years. Committed to building enterprises from the ground up, these entrepreneurs are building the future of America. That said, entrepreneurship can sometimes be cumbersome in spirit, especially in terms of financial planning. Long working hours, lack of financial security, irregular income, managing investors, liquidity issues, insufficient equity, and more, while juggling personal finances, can be a daunting task. Moreover, the Covid-19 pandemic also completely disrupted business across the globe, negating all rules of wealth and financial planning.

While entrepreneurs remain focused on their company and its management, financial planning may take a backseat which can lead to some unpleasant consequences. But simple and straightforward planning, along with help from financial experts, can go a long way in ensuring that entrepreneurs stay on the path to financial independence. If you wish to create a customized financial plan that will enable you to build a successful entrepreneurial venture, consult with a professional financial advisor who can guide you on the same.

Let us explore the importance of financial and wealth management for entrepreneurs and some actionable tips that entrepreneurs can use to plan their finances better.

Why is financial planning important for entrepreneurs?

Entrepreneurs are constantly working towards achieving their business goals. In such scenarios, financial planning becomes essential to manage their finances and make informed decisions about how to manage their money.

Creating a financial plan can be a helpful exercise for entrepreneurs at any stage of their business, whether they are just starting or have been conducting business for years. Financial planning can help entrepreneurs save money, improve their finances, and avoid financial stress. It can also help entrepreneurs avoid making impulsive or emotional decisions with their money.

Primarily, entrepreneurs need to plan out their personal and business finances and keep them separate. Let us study the difference between the two.

What is meant by business financial planning?

When it comes to financial planning for businesses, entrepreneurs need to consider several factors like cash flows, balance sheets, income, and more. A sound financial plan for a business can help entrepreneurs establish clear company goals and work towards achieving them.

A business financial plan also helps entrepreneurs manage their company’s finances, allocate budget smartly, and engage in fundraising when necessary. Meticulous financial planning also helps in essential cost-cutting exercises to mitigate risk.

Be it insuring your business, raising debt, lining up investors to invest their money, or managing equity, financial planning in business is as essential as personal financial planning. A financial planner who is experienced in charting out financial plans for growing enterprises can be of immense help here and can help your business expand sustainably and substantially.

What is meant by personal financial planning?

Many entrepreneurs pump their personal assets and savings into their business to boost its growth. However, such entrepreneurs need to understand when to move their personal assets out of business to safeguard them in case it goes through a period of volatility. Apart from financial planning in the business sphere, entrepreneurs also need to engage in financial planning to save for retirement and financially protect their families.

Moreover, if you have family members involved in your business, you need to consider aspects like business succession, asset distribution (from the business, if any), equity sharing, etc. A well-tailored financial plan here becomes paramount. 

Financial planning tips for entrepreneurs

Entrepreneurs are constantly working to ensure that their company’s financial health is taken care of. However, with excessive management of various business aspects, it’s easy for entrepreneurs to overlook their personal financial planning.

So, to avoid that, here are a few tips that can help entrepreneurs stay on top of their personal as well as business finances:

1. Keep track of your expenses

It’s essential to keep track of both your personal and business expenses. There are several ways to do this, like using a budgeting app, creating a spreadsheet to track your expenses, or writing out your expenses in a journal. This will help you see where your money is employed and where you can cut back.

Entrepreneurs need to understand that tracking personal finances is as important as keeping track of business expenses because their personal finances will heavily impact their business and its management.

2. Create a financial plan

The very basis of financial planning is to create a plan – both short-term and long-term, to understand an individual’s original standing and future growth prospects. This is applicable to all – individuals, businesses, companies, governments, and even entrepreneurs. It is paramount for entrepreneurs to create a foolproof financial plan, not just for their businesses but also for their personal finances. Having a financial plan can help entrepreneurs map their personal goals like saving for retirement, investing or building a company, taking care of their investment and assets, and more. A financial plan can also help you ensure that you and your company are on track to reaching your financial goals.

3. Invest in yourself

The best thing you can do for your financial health is to invest in yourself. This can include taking courses, attending workshops, reading books on financial planning, or staying up to date with the latest developments in the financial world. You will be better equipped to make smarter decisions about your money by increasing your knowledge. When you are wiser with money on a personal front, your business decisions will be clearer.

4. Invest in quality stocks

When it comes to financial planning on both a personal and entrepreneurial front, the best way to secure the future is through stock investments. If you have good risk tolerance, you can look to invest in quality stocks that have the potential to give you good returns in the future. Remember that historically, stocks have performed better than most assets and can also help as a hedging tool during inflation. For example, your stock holdings can come in handy if you experienced a rough year and are in need of liquid funds. However, note that it is important to make sure to do your research and consult with a financial advisor if needed while choosing your stocks.

5. Rebalance your investment portfolio

Rebalancing is an activity wherein you buy and sell assets to maintain a desired level of risk and return. Many entrepreneurs, due to lack of time and knowledge, do not rebalance their portfolios. Such entrepreneurs could be missing good investment opportunities. Therefore, entrepreneurs should regularly rebalance their investment portfolios to mitigate risk and boost their long-term gains.

6. Invest in insurance

An often ignored aspect of financial planning is insurance. Planning for insurance is a critical step in financial planning. Emergencies and health issues often come unannounced; hence, it is better to prepare in advance. Moreover, a lot of entrepreneurs work long, stressful hours; some even have to be on the road for a better part of the year, which may affect their health in the long run. Entrepreneurs must invest in health and term insurance plans to safeguard themselves, their families, and employees against unforeseen circumstances.

7. Have an emergency fund

The importance of emergency funds cannot be stressed enough. Businesses can demand liquidity anytime, for example, when launching a new product, entering a new vertical, etc. An emergency fund can be very beneficial in such cases. It can help entrepreneurs avoid going into debt if something unanticipated comes up. A good financial strategy would be to have 3x-6x of your monthly income as an emergency fund to meet most immediate business and personal needs.

8. Avoid debt traps

Debt is a cheaper source of finance, and most entrepreneurs draw loans regularly. However, if mismanaged, debt can derail business and finances faster than one may anticipate. Once an individual falls into a debt trap, it may become impossible to come out of it. It can also force one into bankruptcy.

As an entrepreneur, you need to be smart about borrowing money and should only draw loans that you need. A fancy car or a trip to the Bahamas may appear to be a lavish lifestyle but will ultimately disrupt your finances beyond repair. An attractive loan offer should not be the reason why you take on additional liability.

9. Make the best use of tax-saving strategies

Tax planning should form the crux of your financial planning. Remember, individuals and businesses are subject to different tax codes. For instance, entrepreneurs and business owners are entitled to several tax-saving schemes that do not apply to non-entrepreneurs. Entrepreneurs can take advantage of this by carefully tracking their expenses and ensuring that all business-related expenses are accounted for. Tax planning is also important for all personal and company assets and investments. They may not only attract huge tax bills but can also eat away your returns. Thus, entrepreneurs must ensure that tax is a top priority when creating a financial plan.

10. Plan for retirement

In the fast-moving business world, entrepreneurs rarely find time to plan for their future or retirement. But entrepreneurs need to remember that, unlike an employee, they may not have access to employer-sponsored retirement accounts and other benefits. Rather, their unsteady income can become a major issue post-retirement. So, if you are an entrepreneur, you need to start investing and saving for your retirement at the earliest. Right from IRA accounts to a strong stock and mutual fund portfolio with proper allocation to debt assets, ensure that your retirement plan is rock-solid. Remember that as an employer, you may also need to make provision for employer contributions for your employees. Plan every aspect of your business and retirement well in advance to ensure a comfortable and stable retirement.

11. Seek professional help