Personal Financial Planning for Entrepreneurs

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In this article we explore the art of personal financial planning for entrepreneurs, the multiple facets that entail personal financial planning, the benefits of personal financial planning to a business, the benefits of personal financial panning to the entrepreneur, as well as personal financial planning pointers that every entrepreneur should adopt.

Financial planning is a practice that keeps your business growing in terms of profitability. Financial planning also heightens an individual’s, and in this case an entrepreneur’s ability to predict, foresee, and plan for potential road bumps, and also to evolve in accordance to any changes that may arise.

One of the biggest challenges of launching any kind of business is making sure that it remains financially viable. However, if your personal finances are not up to standard, if your personal finances are in bad shape, your business will not fare well either. The last thing any entrepreneur needs to be worrying about as they strive to erect a business entity is debt or poor choices of the past that have come back to haunt them.

ASPECTS OF PERSONAL FINANCIAL PLANNING

Prior to taking on the challenge of becoming an entrepreneur, there are a few things that one can do to get their personal financial status in shape. What does a personal financial plan involve?

It is a common assumption that personal financial planning simply entails investing your money, however, there is much more to personal financial planning. Personal financial planning takes on multiple facets inclusive of growing wealth, wealth protection, estate planning, and retirement planning. Some of these aspects are discussed below:

Snowballing Wealth

Snowballing wealth in this context means growing or increasing wealth. Naturally, this is what clicks in everyone’s mind when the topic of personal financial planning is brought up. Growing one’s wealth through investments is a habit that has been encouraged by financial planners for very many generations.

In growing one’s wealth, one ought to consider carefully their goals and objectives, their investment timelines, individual tolerance to risks involved in investment, as well as the most suitable financial plans for them. Depending on each person’s unique situation, it may be recommendable to hold money in liquid form or, on the other hand, it maybe recommendable to place that money in a high risk investment.

However, note that holding money in stagnant state may not be very beneficial to you in the long-run but, ultimately, you should go for an investment strategy that matches your needs and comfort level.

Protecting Wealth

It is pointless and a waste of time and effort to accumulate wealth if you are not going to implement safeguards around that wealth.

One of the most common methods of protecting one’s wealth is placing it under an insurance policy. Your insurance broker will present you with several insurance plans to choose from. Some insurance policies designed to protect your personal finances may be inclusive of life insurance, health insurance, trauma insurance, and income protection insurance.

Insurance policies that protect your finances will work independently, but in the case where an individual takes the whole package, such insurance policies complement one and ensure that your capacity to acquire, maintain, and grow your wealth as an entrepreneur remains protected in case of an adverse event such as illness, injury, or death.

Retirement Planning

In addition to this, retirement planning is a crucial aspect of personal financial planning for any entrepreneur. I understand why it is easy to overlook a retirement plan; you probably assume that you have more than enough time to think about retirement and that your business will be financially stable enough to support you by the time you are even thinking of retirement, however, any wise individual starts making a retirement plan as soon as they begin earning money at a young age because we cannot always tell what the future holds.

A good retirement plan should not simply dictate how your income is invested; a good retirement plan will also address your income requirements at the age of retirement and what measures ought to be taken for you to attain your retirement goals.

Estate Planning

This is an often overlooked aspect of personal financial planning. Estate planning is the undertaking of deciding how your assets and business assets will be executed in the event of your death. The undertaking of estate planning supersedes the mere act of drawing up a will.

A great estate plan ought to work in such a way that the assets are transferred to the right people and in an appropriate time. Note, drawing up a will prior to making  taxation implications could leave your loved ones exposed to tax liabilities that were unplanned for and this could end up eroding the value of the assets and business that you worked so hard for and that you intended to pass on to your beneficiaries. In this case, it would be advisable to recruit a financial planner that would help you draw up a functional estate plan.

Constant Reviews

The final aspect of personal financial for any entrepreneur is ensuring that all the different aspects of financial planning are regularly reviewed and kept up to date. As mentioned above, we cannot always predict what the future holds; therefore, it is imperative that your financial plan constantly evolves in order to stay at par with the changes in your life as well as the world around us.

In order to build a solid financial plan, an entrepreneur ought to evaluate their overall position at least once a year.

Watch this educational video to learn more about personal financial planning.

 

HOW PERSONAL FINANCIAL PLANNING CAN SAVE A START UP BUSINESS

If you are an entrepreneur, especially a new one, I am sure that you worry about numerous unknowns. For example, there is the fear of risking too much in a world that isn’t too kind to startups and entrepreneurs. In order to beat those odds and avoid running out of resources it is important to develop a rigorous personal financial plan that forecasts on your financial demands in next few years as you attempt to take your business off the ground. Smart personal financial planning is essential, but development of an actual plan may feel impossible.

This is why this section of the article was put together; it will enable you as an entrepreneur to see exactly how you could manage your finances as you enter the business world and ensure that you are not overwhelmed by your personal needs coupled with the needs of your business. Here are a few measures that will aid you in keeping yourself and your business financially afloat.

Getting Financial Reinforcement

For example, by getting an additional source of income; a Job. I know, the part of the reason for being an entrepreneur was to be able to be independent of any form of employment. Remember, to avoid getting overwhelmed by your growing needs now that you are trying to juggle between your own finances as well as your business’s, you could always source for financial support for yourself the old fashioned way; by getting a job.

Do not adopt the opinion that because you are an entrepreneur you are beyond employment and the act of getting down and dirty to get the extra financial reinforcement. It does not have to be a permanent job, in all probability it will be impossible to have a full time job and run your own business at the same time; remember this situation is also not permanent, it is a mere necessity as you and your business find financial balance and stability.

The job has to be the kind of employment that takes the pressure off of you financially. Again, do not adopt the notion that you are now beyond hard work because you began your own business entity, therefore, roll up your sleeves and get yourself that extra financial boost that you and your business need.

Preparing Ahead

Personal financial planning enables you to foresee scenarios that are impeding for you and your business. Without a clear picture of what to expect in the first few years as an entrepreneur, there is the risk that you will end up inappropriately allocating resources even to yourself and hence running out of resources to pay bills such as supply invoices or rent.

With proper personal financial planning, entrepreneurs can avoid such misappropriation of funds that will delay or even collapse the business that they put so much time and effort in establishing.

Keep a Minimum Financial Amount

As an entrepreneur, and depending on your financial capacity at the moment, you can come up with a certain amount that you are comfortable with; an amount that remains untouched and unaltered. This minimum amount can be increased gradually as the business keeps growing.

This mode of operation is not only good for your personal finances, but also for the financial well-being of your business as an entrepreneur.

For your business, there is a high chance that there will be a demand of sudden injection of finances at some point. For example, your business could encounter unexpected bills or legal fees, or an opportunity that requires additional funds, such as a client who wants to pay after delivery.

In such a case you will be in a position to lend money to your business as opposed to struggling to pull together the resources required form third parties, which is a hectic and tiring process.

IMPORTANCE OF PERSONAL FINANCIAL PLANNING FOR ENTREPRENEURS

There are several reasons why an entrepreneur ought to perfect the art of personal financial planning, but it is true that most individuals will not be able to recognize the importance of planning their personal finances without receiving a bit of insight.

Personal financial planning is a complex and brutally honest subject to learn and for this reason, most individuals will shy away and make excuses in an effort to avoid having to hear the hard truths that come along with the subject. However for individuals, and in this case, entrepreneurs, who willingly embrace personal financial planning, there are numerous benefits to reap. Some of these benefits are as discussed in the section below.

Cash Flow

When one understands personal financial planning, they understand cash flow better. There is a large number of people that will go through life paying bills and mortgages and then safely put the remainder of their money in bank account.

Most of these people, unfortunately, do not understand the concept of financial planning, therefore, if they end up making right decisions it is usually as a result of luck. Despite the fact that there is nothing particularly wrong with this approach, wouldn’t a person feel better if they were aware of exactly what they were doing with their cash flow?

There is an old popular phrase that says ‘knowledge is power’ and if this is true, it is more so for the entrepreneur. By mastering personal financial planning, one can increase their cash flows through careful monitoring of their spending patterns and expenses, prudent spending, tax planning, as well as careful budgeting, which will enable one to retain most of their hard earned cash.

An entrepreneur that understands the cash flow in their personal finances and does not simply cruise through life will be better positioned to direct his/her business towards financial independence, stability, and ultimately, overall success.

Fear and Uncertainty

As humans, we are prone to countless irrational fears and uncertainties. However, if you think about it, this is a natural reflex because like many other mammalian species, we have been conditioned through millions of years to assume that there is danger in the unknown, and that everything we do not understand is, in all probability, out to harm us. Fear and uncertainty, therefore, naturally go hand in hand and when they happen to converge on an aspect that is as essential for our basic survival as finances, it is easy to experience a paralyzing fear that disables you from acting.

Nonetheless, compare this situation to one where an individual understands how their cash flow works as well as understanding their entire financial situation. As an entrepreneur, such an individual would not be afraid of acting for their business since there is no uncertainty or guess work involved; that person would not be shooting in the dark with their business’s finances because they would already understand exactly how to plan those finances effectively.

As an entrepreneur you are a lot more likely to be prone to fear and uncertainty when you have no knowledge of where your money comes from, where it should go, and how it should be budgeted. Understanding this process and eliminating fear and uncertainty begins with mastering personal financial planning.

 

Utilization

When one truly commands personal financial planning, they will also appreciate the concept of utilization. An individual that does not appreciate personal finance is an individual that is unlikely to practice saving and will instead spend anything that they have left after catering to their bills and expenses.

While there is really nothing wrong with spending your hard earned resources, this may be a habit that may hamper you in your entrepreneurial endeavors; you will not appreciate the concept of reinvesting or saving, concepts that personal financial planning ingrain in a person and your business may end up failing as a result.

On the same note, if an individual refrains from spending and at the same time does not understand personal financial planning, the result may be the same. Notwithstanding, money safely kept away in the bank would be available to you at will as opposed to a situation where that money was spent, it is not being utilized to the fullest extent by simply lying in a bank account.

Only an individual with an understanding of personal financial planning would understand that, as an entrepreneur, the money being safely stashed away should at least be stored in a high interest savings account or be invested in activities that bring a higher interest rate, and if not, reinvested in the business to facilitate growth and expansion. Understanding utilization of resources does not simply begin when one becomes an entrepreneur; it is a culture that is cultivated from understanding the utilization of one’s personal finances.

Better financial understanding and success as an entrepreneur is achieved when one learns to make perceivable financial goals and effect of decisions in their personal financial life, which would subsequently give a new approach to budgeting and enhancing control in the financial life of their business.

 

PERSONAL FINANCIAL PLANNING POINTERS FOR ENTREPRENEURS

Debt Reduction

As an entrepreneur, tackling debt is a necessity if you want to maintain a success in your personal life as well as your business. If one does not work strive to avoid debt they risk damaging their credit ratings, which usually come in handy when there is a sudden need for urgent financial assistance.

The culture of debt reduction and avoidance is learnt through personal implementation of the same in one’s personal financial plans and then translated in business. Failing to reduce one’s debts could severely hurt you and your business’s ability to borrow money necessary to grow the business in the future.

As an entrepreneur, it is your duty to focus on the elimination of the debts that have the highest interest rates first, for example, student loans. In case you have multiple loans you should consider debt consolidation. The only downside is that, although the interest rates of consolidated debts may be lower, the repayment term usually extends over a long period of time. Therefore, a careful consideration of a suitable debt repayment plan is important. Ingraining this practice in your personal finances will make it more natural to incorporate in your business as an entrepreneur.

Spending Habits

When you become an entrepreneur and begin earning, this is not the time to be going for that expensive car that you always wanted and begin accumulating debt.

Instead, it is extremely important to carefully consider how you are spending and why. Otherwise you will end up straining your business so much that it remains stagnant and unable to grow.

If you are a person with unhealthy habits, there has never been a better time to keep those in check. For example, when you come to the realization that you are an impulse buyer, it would be advisable to mitigate this issue in your personal finances before it spills over into the businesses finances and contributes to the business’s debt. You will not last long in the business world if you approach business purchases with the same level of restraint you display in a shopping mall.

Building an Emergency Fund

A majority of the population does not understand the importance of making savings meant for emergency situations. While this is not a good lifestyle choice, it is especially bad for entrepreneurs.

A great emergency fund will not only keep you afloat in your personal expenses for well over six months if need be, but can also be used to aid your business through lean periods when your business is struggling.

Save Beyond Traditional Recommendations

As an entrepreneur you ought to have an emergency savings fund available even prior to opening a business. This is to ensure that you have enough resources and that you are prepared for the strenuous period from the start of the business through to the period that it actually becomes profitable. A period of at least 12 months of saving is recommendable.

In addition to this, instead of placing all the savings in a single account, entrepreneurs should open separate accounts; one for the business’s emergencies and another for personal emergencies where either of these accounts can only borrow from the other in times of utmost necessity.

Reduce Spending

As mentioned above, this is not the time to be buying a new house or a new car. As an entrepreneur you have employees who look up to you financially and as such, they ought to be given priority over your personal ambitions.

To be able to reduce on your personal spending it may be important to employ the services of a professional financial planner who you could work with quarterly. As an entrepreneur a financial planner may be just as big a necessity as a lawyer or a public accountant if you are going to get past all hurdles in your way to achieve success and stability in both your personal financial life as well as your business’s.

Establishing a Risk Management Plan

Risk management measures such as insurance are always a good way to go when it comes to financial planning. In addition to this, ensure that your assets are protected by being properly titled in order to avoid any probable legal issues; ensure that the same has been done for your business in order to avoid straining either your finances or that of your business in the event of a legal issue. Reducing liability is a good measure, but placing safeguards against foreseeable risks will also ensure that you and your business stay financially afloat.

As an additional risk management measure, it is important for an entrepreneur to keep your personal finances separate from those of your business. Having separate bank accounts for these two functions prevents confusion when it comes to spending, for example, paying bills or payroll. It is extremely vital for the entrepreneur to consider business a completely separate entity from himself; otherwise they risk unduly losing personal assets in the course of running the business or, alternately, unduly spending business resources in personal advancements. 

IN SUMMARY

For one to achieve goals of any kind, one needs a path or course that steers them in the right direction. For the entrepreneur, the financial plan, and more so the personal financial plan, is the guide to use in order to keep moving in the right direction.

Developing a good financial plan demands that you gather accurate facts about your personal finances and by using this information one is able to compile useful personal financial reports that are inclusive balance sheets, income tax estimates, asset listings, liabilities, income and expense statements, among other important financial reports. Through this process of fact finding, one is able to identify the strengths and weaknesses in their personal financial state. This will enable an individual to initiate a higher awareness level and make informed decisions that will pave way not only for personal financial wellness and stability but that of their business.

Once you have gathered the necessary facts one can begin looking into the future. Where do you intend to be in ten years? Are you financially on track to ensure that long-term goal becomes a reality? What changes do you need to make in order to arrive to that projected point in future? How is your business being affected by your personal financial planning practices? Is the business gaining or losing as a result of those practices?

A personal financial plan is a process that enables you to address the important financial matters in your life and as an entrepreneur; this will include your business. The purpose of personal financial plan is to enable you to attain financial stability and wellbeing by making specific recommendations and indications that aid the purpose of enhancing your financial condition and ultimately, that of your business.

In summary, a personal financial plan for an entrepreneur addresses the following important matters

  • Your long-term financial goals
  • Where you are financially and where you project yourself in future
  • How your business is affected by your personal financial practices
  • What changes need to be implemented to attain personal financial safety and stability as well as that of your business

The process of gathering necessary information and assessing your personal financial status in order to come up with an approach that is specifically suited for you in order to achieve financial wellbeing is the heart of a personal financial plan. Personal financial planning is a consistent practice that pays off over time.

Entrepreneurs who prepare personal financial plans can fairly expect to attain higher levels of income in the future as opposed to those who do not prepare financial plans. As we sow, so shall we reap.

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