It takes the right kind of person to take the leap and become a solo business owner. But if you’re like me, you know building your own machine is worth it so you don’t become one of many cogs in someone else’s system.
If you run a solo or small business, financial planning takes on a few extra dimensions. Being smart about your business finances helps you avoid the surprises and headaches that cause most solo business owners a lot of stress.
Here’s a few tips I’ve developed through the years of working on financial plans for solo business owners.
1. Treat Yourself Like an Employee
When you make the mindset shift from freelancer to CEO you realize something – employees work harder when they get paid on time. And as CEO, you should regularly reward the sales team (you), project manager (also you), and the janitor (that’s still you) with a regular paycheck.
If you’re sealing the deals and emptying the waste basket your diverse list of job titles deserves some regular compensation.
Smart Tip: Set up a regular, recurring paycheck for yourself. Even if they are just automated transfers into your personal checking account--pay yourself regularly.
2) Set Up the Right Retirement Plan
Most new business owners roll over an old company retirement plan into an IRA, and because it’s there and familiar, it can become your default retirement plan .
As your business income grows, your max IRA contributions probably won’t be enough.
Options like a SEP IRA or Individual 401K can be great options for business owners who need to contribute more than a regular IRA allows to their retirement.
Smart Tip: Talk to your financial planner to determine a contribution amount and plan for you.
3) Separate Your Money
Can you imagine if you learned an employee used their business credit card to pay for a personal expense? Do you get that mad at yourself as the solo business owner?
When you mix your personal and business finances you create accounting headaches for your bookkeeper and CPA. Worse, if you’re ever audited this accounting snafu could bring the displeasure of the IRS, causing even more headaches for you.
Smart Tip: Solo businesses perform better when they have a clear view of their financial picture. Bring it into focus with separate bank accounts and credit cards. Your current bank can set this up for you in a matter of minutes.
4) Avoid Famine by Managing the Feasts
Just like you have an emergency fund for your personal finances, you should build a financial buffer for your business too. It’s tempting to cash out after a big project, but if you hold steady with your regular paycheck, the cash reserve you create will open new possibilities for your solo business.
I suggest my clients use the times of strong cash flow to save for unexpected expenses and to set aside money for future quarterly tax estimates.
Smart Tip: Manage your cash flow with smart systems that keep payments to yourself regular & recurring. Create separate accounts for your quarterly tax savings and create a buffer for your business during slow months.
5) Build a Team of Financial Professionals
What part of your work do you really love? What aspects of your work can only you do? The most successful solo business owners tend to do those things, and outsource the rest.
When it comes to your business finances I suggest solo business owners hire a:
- Financial planner
Working as a team, these financial experts can help you evaluate both your business and personal finances. The bookkeeper and accountant (preferably a CPA) will help you keep your records straight, minimize your tax burden, and file your quarterly and annual taxes. A financial planner (preferably a CFP® professional) can help you get your personal finances on solid financial footing and prepare for the future.
Smart Tip: Get a referral before you hire. Financial professionals tend to know the reliable service providers in your community.
When I work with solo business owners on personal financial plans, business finances always come up. A bit of small business financial planning is one of the perks with working with a Certified Financial Planner™ professional who is also a solo business owner.
Have more questions about financial planning for solo business owners?