Consult by Momentum financial adviser Helain Uys shares tips to help entrepreneurs balance their business growth goals with building personal wealth. Picture: Pexels
It’s twenty-twenty-thrive and you’ve decided you’ll finally take the leap and start your own business. Or perhaps you have been flirting with a promising side hustle for some time, and you’re ready to turn your part-time gig into a full-time thing.
For those who have chosen to journey down the rewarding path of entrepreneurship, it is important to keep in mind that it typically brings with it an entirely different set of financial challenges and priorities than those you may have known as a salaried employee. It is important to understand what these are so that you can safeguard your personal financial well-being.
Without the security of employment and the benefits it can provide – such as paid annual and sick leave, partly subsidised medical and retirement contributions, etc – you will need to adjust your lifestyle and plan your finances accordingly.
One of the most common pitfalls she sees among small business owners is that they’re so focused on their business growth and success that they forget about their own finances.
Entrepreneurs are often deeply involved in the day-to-day operations of their business and may not allocate enough time to think about important financial needs such as retirement. They may rely on their business as their main source of future income and tie up most of their savings and resources into the business, believing that the company will eventually provide them with wealth. Oftentimes, personal financial security is sacrificed in favour of reinvesting profits to fuel business growth.
Additionally, there is often a blurring of lines between business and personal, with some dipping into their business funds to cover their personal expenses and vice versa – which can get extremely messy down the line.
Here are following tips for entrepreneurs to help them balance their goals for business growth while building personal wealth:
Separate business and personal
Open separate bank accounts and credit lines for business and personal finances. This separation helps in tracking both business expenses and personal wealth-building goals without confusion.
Additionally, have a separate emergency fund for the business to cover unexpected operating expenses or downturns. This helps to avoid drawing from personal savings or relying on short-term debt during tough times. By that same token, build a personal emergency fund (6-12 months of living expenses) so that you can avoid using the business’s profits or taking on debt for personal needs.
Prioritise personal financial goals
Define clear financial milestones and align them with your business performance. For example, if the business achieves a certain revenue target, it may trigger a personal investment. Regularly assess your business growth and personal wealth-building progress and adjust if necessary.
Define the percentage of profits that will be reinvested into the business. This could range from 30% to 70%, depending on your growth stage and strategy. For example, in the early stages, reinvesting higher amounts (60%-70%) may be necessary, while in more established businesses, this could be reduced to focus more on personal wealth.
Set yourself a consistent salary based on the business’s financial health. This ensures that you are regularly compensating yourself while maintaining a stable income, regardless of fluctuations in business profits.
After setting a salary, treat personal wealth-building as another fixed expense. Automate regular transfers to savings, investment accounts, or retirement funds. This ensures personal wealth goals are not neglected.
Protect your eggs by spreading them across multiple baskets
Investment diversification is important for all investors but especially for entrepreneurs. Consider a mix of traditional retirement accounts, real estate investments, stock portfolios, and possibly tax-advantaged accounts to build wealth in different sectors.
Entrepreneurs face unique risks and challenges that salaried employees may not encounter in the same way, and this is where different types of business-focussed insurance – such as business continuity, liability, asset protection, business interruption, and key person insurance – can play a critical role in the survival of the business should the worst come to be. “It is important to chat with your financial adviser about what you should prioritise from a financial standpoint, depending on your personal goals, business operations, and how your company is structured.
A qualified financial planner will be able to give you the advice that you need to build and protect your financial dreams.
* Uys is a financial adviser at Consult by Momentum.
PERSONAL FINANCE