Dear Dangerously in Love with Your Finances,
I’ve owned my online business for two years and am experiencing an exciting period of growth. There are so many things I’ve wanted to purchase to invest in my business, and I’m wondering how I should prioritize what to get when. Also, I haven’t been in a position to set aside savings in my company until now. How much should I try to put away?
Hi Pondering Prioritization,
We all know the importance of saving in our personal lives. For some reason, I find that that knowledge doesn’t always transfer to entrepreneurs when it comes to their businesses.
To put it bluntly, I often see business owners spending the income they earn in their business almost as quickly as when it comes in.
Investing in your business is smart. But so is leaving something in your bank account for a rainy day. Here are just a few of the many reasons why:
1. Business is cyclical.
Regardless of whether you are a service or product-based business, you will find that there are rhythms to when you receive your revenue. There are busy times and there are leaner times. This reality can make it challenging to plan out your budget for the year, which is why having money in the bank to smooth over the dry spells is critical.
2. Prepare for changes in the economy.
Entrepreneurs never have enough time. That is a truism of running your own business. However, you can’t afford to keep your head in the sand. It’s important to be aware of what’s happening in your industry as a whole as well as with your customers. That means paying attention to economic trends.
As is the case in business, there are hills and valleys in the national economy. Some of that direction will impact your company. While at one time talk of trade wars may have seemed irrelevant to your life, it’s something to keep an eye on because it may directly impact your business.
It may not happen now, but at some point, the economy will slow down. Do you have a plan for your business for when this occurs?
3. Save for your taxes.
The savings is only short-term, but as a small business owner, you should steadily set aside money to cover your tax liabiilty. Don’t let that that number take you by surprise come April. The amount will vary depending on the structure of your business. Be sure to talk to your tax accountant now about how you should prepare for this expense.
4. You Provide Your Own Benefits.
You know that you should pay yourself in your business. But there are significant differences to being self-employed versus being in a traditional workplace. Among those are the fact that you must provide for your own benefits.
It’s a wonderful moment when you are able to draw a reasonable salary from your business. And then you need to pull in even more to cover healthcare and your retirement savings.
Yes, you must plan for your own retirement, and it’s an area too important to skimp.
Inc. magazine looked at this issue last year and found the following:
“Of small business owners who lack savings plans, 37 percent said they don’t make enough money to open a retirement account. And many small business owners opt to reinvest a significant portion of their income back into their business, instead of putting it toward a retirement fund. While using your personal savings to expand and improve your company may feel natural, doing so could severely endanger your plans for retirement.”
As with time, there’s not enough money to go around, especially in the early stages of your business. But planning for a stable future is non-negotiable–if you don’t plan for your own retirement, then no one else will.
Planning out the finances for your business is a balancing act of investing your time and resources and also putting money away for a rainy day. These savings will benefit your wellness and future, both personally and professionally. Think carefully about what you must have now to run your business successfully and what can wait until later. And be sure you’re not saying, “I’ll do it later” when asked about savings for your business.
Thanks for asking this really important question for all business owners. Congratulations on your success, and best of luck to you!