One of the biggest challenges when launching a business is balancing how to grow with managing your cash flow and expenses. Startups can take months or even years to start showing substantial profit, but that doesn’t mean you have to wait until you’re established to practice good financial habits. Paying attention to your financial wellness can have measurable results for the long-term health of your business.
What you need to know
- While you should keep your personal and business finances separate, your financial wellness as a business owner encompasses both.
- Financial wellness strategies include managing your cash flow and expenses using automated software, keeping emergency funds to cover three-to-six months of expenses, and managing debt responsibly.
- For retirement and tax planning, consult with financial advisors and regularly review your financial strategies to adapt to changing circumstances.
What is financial wellness?
Financial wellness refers to the quality and stability of your finances. For entrepreneurs, this concept encompasses both personal and business finance, even though it’s prudent to keep them separated. Having good financial habits promotes the health of your business—as well as your mental health.
Basic financial wellness requires you to maintain cash flow, manage your expenses, and plan ahead.
Separating business and personal budgets
You should separate your finances—choose a business checking account to ensure your business expenses don’t interfere with your personal finances and vice versa. However, even while separated, your different finances often impact each other. For example, when applying for a small business loan, the lender may want to examine your personal finances.
Separating your finances also makes managing them easier, especially when preparing to file your taxes. Use budgeting apps, spreadsheets, and financial advisors to help you manage your money more efficiently.
Cash flow management
You can track cash flow using the direct method (tracking actual cash in and out) or the indirect method (tracking receivables and payables). Either one of these methods can help you optimize cash flow, increasing your profit margins and improving your financial wellness.
In business, cash flow optimization is the process of cutting expenses and improving operational efficiency. Analyze your financial processes to find room for improvement. For example, use digital tools to automate your accounts payable and invoices, and negotiate terms with your suppliers and landlord.
How to maintain emergency reserves
Emergency funds should cover three-to-six months of expenses. One way to save that is to put aside a small percentage of your revenue in a high-interest account or low-risk investment fund. Be sure once again to separate your personal and business funds so you can cover different types of unexpected events.
Business debt management
Financial risk management comes into play when you start taking on debt. Entrepreneurs launching their first business often use their personal credit cards for expenses. That might give you more spending bandwidth but also costs you more in interest charges and monthly fees. You’re better off using a debit card from your business checking account.
There’s a difference between good debt and bad debt. Taking out a small business loan to invest in your company is good debt, because it ultimately generates new revenue. Using high-interest credit cards to pay for daily expenses can create bad debt if you fail to pay them off on time.
Retirement planning for business owners
Implement tax planning strategies like maximizing deductions and credits, contributing to tax-advantaged accounts, and timing income and expenses to minimize tax liability. Keep detailed records of all financial transactions and work with a tax professional to navigate complex tax laws and optimize your tax situation.
Common tax pitfalls include underestimating tax obligations, failing to keep proper records, and missing deadlines. Avoid these by setting aside funds for taxes throughout the year, using accounting software to track expenses, and staying informed about tax law changes. Regularly consult with a tax advisor to ensure compliance and take advantage of available deductions.
Tax planning for personal and business finances
Tax advice for small business owners should come from tax professionals. They can help you maximize deductions and credits, optimize the amount you should be depositing in your retirement accounts, and comply with tax laws. Use a business checking account that automates your financial records and allows your accountant to access them securely.
How to maintain financial wellness as a small business owner
While it’s important to pursue financial literacy as a small business owner, if you’re not a financial expert, hire one—either in-house or as a consultant. It’s especially important to consult with a financial advisor for guidance during major events, either at your business or in your personal life. In both your personal and business affairs, regularly review your budgets, expenses, and cash flows so you can adjust to changing circumstances.
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