While everyone can benefit from financial planning, different careers require different approaches. Financial planning for entrepreneurs (our focus for today) involves an approach that demands an especially unique strategy.
As an entrepreneur, not only are you responsible for your personal finances, but, given your role as a company owner, you are also responsible for your business finances. That context can come with a whole host of challenges and opportunities.
With that context in mind, we are going to walk through a practical, step-by-step approach to comprehensive financial planning for entrepreneurs – to help you move toward the future you hope for.
1. Evaluate Your Current Financial Situation
To know where you need to go, you first need to understand where you already are in both your personal and business finances.
For many entrepreneurs, that means separating your annual personal and business accounts to create a more informed, organized picture.
Once you have done that, you may find it easier to analyze your income, expenses, and liabilities. Knowing where all your money is coming from, where it is going, and what you need to pay off can be a great start to comprehensive financial planning.
2. Set Clear Goals
Now that you have a better foundation for understanding your financial situation, you can start thinking about where you want to go, both personally and through your business venture. In other words, this is the step where you get to look ahead and dream.
Dreaming about the future can be both a serious and fun step: there may be a lot at stake (the success of your business and the wellbeing of your family), but there is also a lot that can motivate and excite you to press on. Dreams, after all, can change the course of nations (just ask Martin Luther King Jr. or Joseph from the Bible).
Once you have a longlist of goals to work towards, you might want to take time to reflect on those goals, pulling out the ones you believe are most reasonable, attainable, and actionable, and placing them in a shortlist.
Intentional, fleshed-out goals like these can act as a great road map for the various ‘financial milestones’ you hope to reach one day. On the flipside, settling for vague, non-specific goals can make it much harder to move forward in your financial planning process.
For entrepreneurs, specificity can be key, even if you end up deviating from your financial roadmap further down the road: the more concrete your goals are, the more you can judge whether or not you are heading in the right overall direction.
3. Design Two Solid Budgets
After you understand your current financial state of affairs and know where you want to head, it may be wise to set up a realistic budget – one for your personal affairs and another for your business finances (otherwise known as forecasting).
As you undertake this dual process, you can break down your income and expenses from the first step into monthly increments. This monthly breakdown can help you see what money is coming in and what you are spending it on on a more granular level than your big-picture annual accounts. A budget like this can help you know what specific items to trim if money gets tight.
It might feel like a large administrative burden to separate out your budgeting in this way, but that’s part of what running a personal business is all about. It’s also an essential component of financial planning for entrepreneurs, since having a clear financial picture can help you weather unexpected future problems with greater awareness of your options and potential solutions.
4. Create a Contingency Fund
Speaking of unexpected future problems… you never know what the future may hold. That’s why setting up some kind of contingency or emergency fund can be a great idea for many small business owners.
For your personal emergency fund, you may want to set aside 3 to 6 months’ worth of monthly expenses – or up to 9 months if your entrepreneurship looks like seasonal or gig work. That number will be easy to figure out if you have completed step 3 (just multiply your monthly expenses by 3, 6, or 9 for some emergency fund options).
Having this kind of contingency fund in place could provide an alternative to high-interest credit cards or other credit options if times get tough – and they could be essential in keeping your business afloat. Not planning ahead with a fund like this could hurt your business in the long run if you do resort to high-interest options, as you may spend more time repaying the interest than adding to your profit sheet – not the most enticing option for an entrepreneur.
5. Invest Your Profits Wisely
If having a personal business brings extra administrative work in some areas (e.g., budgeting), it can also open up options elsewhere – including how you choose to invest your profits.
When investing as an entrepreneur, you have access to both standard options (savings accounts, stocks and bonds, mutual funds, annuities, etc.) and to investing back into your business.
When choosing how to invest your profits, you might want to consider the principle of diversification: not putting all your eggs in one basket. That’s where working with a certified financial planner (CFP®) could offer a great value-add: a CFP® can help you build a diversified portfolio, with varying levels of risk to suit your situation. They may even be able to help you match your values with your investment choices.
One way to put your values front-and-center is to take up the option of investing your profits back into your business – whether in the form of new hires, new equipment, new technology, or anything else. This might seem like a scary proposition at first (when you could otherwise take a larger personal paycheck at the end of the financial year), but it could end up helping your business grow in the long-term. Sowing into your business like this can help to generate a harvest further down the line.
Some other areas you might want to reinvest profits into include:
- Marketing (to spread the word about the problem your business solves through its products or services);
- Industry-specific events/conferences where you can network with and learn from professionals who share your interests;
- Specific investments into improving your products or services (e.g., by buying higher-end components for improved quality); and
- The emergency fund we mentioned earlier (you never know how that could end up protecting your business).
6. Establish Plans for Your Estate
Most of us don’t like to think about this, but the truth is that we will all pass away one day – and that means releasing our businesses too. The question is: what will happen to everything you have worked so hard for? And who, if anyone, will take over your company?
These are great questions, and we believe they deserve deliberate, careful answers – ones that involve planning in the present, so that they are not left up to chance. The most obvious way to do that is to draft binding legal documents and agreements to enforce your wishes, whether personal or business-related.
As part of that process, you may want to consider working with a certified financial planner (CFP®) or a Retirement Income Certified Professional (RICP®). Both CFP®s and RICP®s can walk you through the complexities of estate planning, whether for your business or your personal life.
7. Monitor and Adjust Along the Way
Just like running a business is a day-to-day affair, effective financial planning for entrepreneurs can require regular maintenance and oversight. If you think you can just ‘set it and forget it’, you may end up falling short of the dreams you so painstakingly brainstormed in Step 2.
As part of this regular maintenance, we would recommend meeting with your certified financial planner (CFP®) at least once a year. This can allow you to see where your business’s financial plan is prospering and where you may need to make some changes. Your CFP® may also take on some of the daily management responsibility for you, especially when it comes to your investment portfolio, so you can focus on running your business.
8. Manage Risk with Insurance
As any entrepreneur knows, setting up and running your own business involves a lot of risk. Depending on your business structure, you could be putting a lot on the line if your business fails – both tangibly (in the form of business assets and liabilities) and intangibly (your reputation and livelihood).
That’s why getting appropriate insurance can be such a wise move for entrepreneurs. The type of insurance you will need depends on the exact nature of your business, and any relevant personal needs you and your family have.
As with your estate planning, meeting with a certified financial planner (CFP®) could help. CFP®s are trained and equipped with a range of insurance options, as well as knowledge about which insurance policies you may want to avoid. Given that CFP®s are fiduciaries, they are legally obligated to act in your best interests at all times, which typically means they will only recommend products that actually suit your business and personal circumstances.
9. Connect With Your Community
As your business grows, don’t forget the people around you! There are opportunities in every community to give back. This may not be on every “financial planning for entrepreneurs list,” but it can be a huge blessing for you and those you choose to help.
If, for instance, you choose to donate some of your business profits to charity, you can benefit from a tax deduction – but the potential blessings don’t stop there. Being known for doing good through your business can improve your standing in the community, and indirectly encourage people to support your business. It can also open up doors for unexpected partnerships, as you might get to meet new people.
After all, many entrepreneurs are motivated by the desire to leave a meaningful legacy; why else would you forge your own path in the business world? Choosing to help at a charity event – for example, serving meals, helping with food distribution, or volunteering in a way that aligns with your values – can leave an indelible mark on the world, especially if it becomes a regular feature of your operations.
We’ve reviewed a decent chunk of information so far, and we have mentioned working with a certified financial planner (CFP®) several times. Let’s quickly examine what we CFP®s like those at Iron Point Financial do, and how we can help you work towards your entrepreneurial goals.
A certified financial planner (CFP®) typically helps clients in a long-term financial relationship, leveraging their financial education, skills, and access to financial platforms on your behalf. They can help you manage your finances year-round, actively working with you, not just for you, as you pursue your dreams.
At Iron Point Financial, our focus is on people over products. That means our aim is not to sell you something, but to find options and co-create a roadmap that fits who you are and what you care about. The way we do that is by sitting down with you to understand your financial situation, goals, and values, so that we can recommend financial products and services tailored to your unique needs.
If that is something you are interested in, why not schedule an appointment today to meet with an Iron Point Financial CFP® or RICP®? We would love to get to know you, and to co-create a financial roadmap you can use for the rest of your financial planning journey.
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
