Most people who start their own businesses do so out of passion. You may or may not be the most skilled bookkeeper. However, whether you can do complicated tax equations in your sleep or you rely on the help of a CPA, there are some significant financial decisions every entrepreneur must make at some point.
How much money does the average business owner make? According to PayScale, a United States business owner’s median salary is $69,000 per year. Of course, some make more, and some make less. No matter how high your profits, you’ll face the same financial decisions as every other business owner along the way.
Knowing what decisions to make when is a big part of your overall success as an independent entrepreneur. Here are the top financial choices you’ll have to make as a small business owner. You’ll face others along the way, but these can impact your life in drastic ways.
1. Reinvest Part of Your Profit
In the early stages of your startup, you may have barely covered expenses. As you start to grow and bring in more profit, it’s time to allocate where those funds go. Wise entrepreneurs reinvest some of their profit back into their business to help it grow and see a bigger return each year.
Think about the averages for different needs. For example, most small businesses spend around 7% of their revenue on marketing. You may want to set aside money for upgrades as well. Factor in how much more income each change might bring and track results carefully to ensure you’re spending money wisely.
2. Take Out Life Insurance
As a business owner, you have both your family and your employees counting on you. There are numerous stories of small businesses shutting down because the owner didn’t have a plan in place and died unexpectedly.
Life insurance is an investment that can keep your family and your business afloat. Many employers offer some basic compensation to employees. As a self-employed person, you’re responsible for ensuring you have insurance to cover your family’s needs during a difficult time.
You should review your life insurance once a year. Any big life changes warrant a change in coverage, such as starting a new business, getting married, or having a child.
3. Save for a Rainy Day
At some point in your business, you’ll run into hardship. A tornado may blow out the front of your store. A flood might damage some of your merchandise. A competitor may open next door and throw you for a loop.
When times are good, put aside funds to cover the hard times. If business falls off for a while, you’ll be able to survive where other brands don’t. You’ll have some extra funds to keep playing a top-notch employee, so you don’t lose them to a competitor.
Put aside enough to cover expenses for six months to a year, and you’ll never have to stress while waiting for an insurance payout or business to pick back up.
4. Fix Cash Flow Issues
According to CBInsights, 29% of businesses fail due to a lack of cash flow. There are many contributing factors to a lack of funds. Poor management, too much competition, lack of needs for services, and a run of bad luck can all contribute to the problem.
Some entrepreneurs seek loans to get them through hard times. Deciding to take out a business loan is a considerable risk. You’re putting your name and business on the line. If things don’t improve, you may find you can’t repay the loan.
While a line of credit can help you through growth spurts, try every other means of drumming up the cash first. Run promotions with current customers, seek funds from investors, apply for grants and bring silent partners on board.
5. Pay Yourself
When they struggle to launch, many business owners pay everyone but themselves. However, you’ll quickly get burned out and your personal finances will hit rock bottom if you don’t allocate a salary to meet your basic needs.
Make sure you pay yourself what you’d make in an outside job. There isn’t much point in working as hard as entrepreneurs do if you don’t see a profit. Outside of the first few months of business, you should always cut a paycheck to cover your cost of living needs.
If you find you can’t pay your salary, your business isn’t thriving. It may be time to make some difficult decisions about the future of your company.
6. Expand Your Business
In an ideal world, your company grows rapidly. You suddenly need more space, more employees and more products to sell. Expanding your business is one of the most significant financial decisions you’ll make in the life of your brand.
Make sure you can sustain the growth level for the next five to ten years before signing a lease on a larger building. Take the time to assess whether you can keep paying a new employee. It isn’t fair to hire someone and let them go a year later due to lack of funds. They could have spent the year building their career elsewhere.
Think through every scenario and make the best possible choices for the future of your company.
Many people have gone through the steps of building a company. Find a mentor or two and seek advice when you aren’t sure what your next move might be. Learn from the mistakes of others, so you don’t repeat them. With a little foresight, you’ll build an enterprise competitors can’t touch and secure your financial future in the process.
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