Small business owners have a knack for starting out with a goal and doing whatever it takes to achieve it. But while many entrepreneurs are great at building businesses, some are less proficient at protecting the wealth they’ve created. Once your business has established a solid cash flow, you should be thinking about how to make your money work as hard for you, as you do for it.
Why You Need a Financial Roadmap
Like every aspect of your business, personal financial success doesn’t just happen – it takes planning and a certain level of dedication. A financial roadmap is a detailed plan for understanding where you and your money stand right now, where you’d eventually like to end up, and how you’re going to get from point A to point B.
Examining your relationship with money is a great place to start when it comes to investing in your financial future. That means:
- getting a handle on your assets and earning potential,
- recognizing your positive and not-so-positive financial habits,
- figuring out your short and long-term goals, and
- learning to manage debt and other financial risks
Wealth planning is a little different for entrepreneurs than it is for non-business owners. But creating a financial roadmap can help take the guesswork out of how to convert your professional success into personal financial achievement.
4 Steps to Wealth Planning
The key to wealth planning lies in controlling your spending and saving, getting business loans and lines of credit paid down, and maximizing your income with an effective investment strategy. Your financial roadmap should also lead the way to a successful exit from your business - and the means to retire whenever you’re ready.
Step 1: Define Your Starting Point
Wealth planning begins with identifying your personal starting point on the road to meeting your financial goals. That starting point is determined by your net worth: the difference between your assets and liabilities.
Add up and deduct all the money you owe for things like:
- mortgages, credit cards, and car loans
from everything you own, including:
- cash, real estate, investment holdings, and the value of your business
The difference between these two amounts is how much you’re worth right now.
Online worksheets and other resources are readily available to help you figure out your personal net worth. And the best thing about this calculation is that performing it at regular intervals lets you track and measure your financial progress.
Step 2: Clarify Your Goals
What does retirement look like for you? How will you know when it’s time to sell or pass on your business? These are some of the questions you should be thinking about when creating a retirement plan.
Many entrepreneurs are unaware that an integral part of building their business includes planning their eventual exit. In fact, the payout associated with a successful exit strategy often forms an important part of the small business owner’s retirement fund.
But not everyone will wait for retirement to cash in on their business success. Whether you hope to travel, buy a house, take up golf, or help your family along the way, short-term objectives like these also require careful thought and planning.
Step 3: Manage Your Cash Flow
The money that flows in and out of your life is the financial vehicle that will get you from point A to point B. The more you earn and the less you spend, the faster – and more direct - your route to retirement will be.
Creating a budget and sticking with it is the best way to make the most of your income and control your expenses. But the very first rule of budgeting for entrepreneurs is to keep your business finances separate from your personal life.
Step 4: Strategize for Greater Success
While your cash flow situation is what it is today, there are ways to make it significantly better tomorrow.
Strategies that can positively impact your finances – and get you to your destination faster - include ramping up earnings with financial investments, reducing personal and business taxes, and minimizing financial risk and exposure.
- Consider dedicating a regular portion of your income to interest or dividend-bearing investments
- Explore the possibility of setting up company-sponsored healthcare benefits for you and your family
- Avoid the risk of financial hardship by investing in life and disability insurance
- Investigate retirement plan tax shelters, maximize business expense claims, and find out the most profitable way for your company to reimburse you
Remember that running any type of business already involves a certain amount of risk. To protect yourself, avoid overly aggressive investments and take advantage of professional advice when it comes to your tax and insurance options.
Getting the most from your financial roadmap – and making the right decisions from the outset – includes knowing the value of your business. Your accounting professional or small business consultant can help you understand what you own, what it’s worth, and how much money you should consider funneling into other investments. Only with this knowledge can you design a wealth plan that protects what you’ve worked so hard to create.