Ready to Start That Business? How to Prepare Your Finances

For some people, starting a business may sound like a great new adventure.
Perhaps you’re no longer passionate about your current career path, or you want to trade in the nine-to-five hustle for a job on your own terms. Maybe you recently experienced a layoff and are looking for a fresh start.

Before you leap headfirst into your new venture, it’s important to make sure your finances are in top shape. Here are six tips to help you get started.

1. Plan for “rainy days”

Most experts recommend that families and individuals set aside an emergency fund equipped to cover three to six months’ worth of living expenses. If you’re starting a business, you should save double or triple this amount, aiming for nine to 18 months’ worth of living expenses to cover the unexpected.

You should also consider having two separate cash reserves: one for personal emergencies, and one for business emergencies. In many cases, new entrepreneurs will experience a lull in cash flow until they start making a profit. Therefore, it’s a good idea to prepare in advance and set aside extra savings that can tide you over until your business takes off. You’ll also have peace of mind in knowing that you have a financial cushion to lean back on while trying to get your business up and running.

Ready to Start That Business? How to Prepare Your Finances

2. Keep your business finances separate from your personal finances

Beyond emergency cash reserves, it’s important to keep all of your personal finances separate from your business finances. Maintaining a distinction between these two types of expenses will help reduce your personal liability; it’ll also help you better track and control your finances when it comes to paying bills, filing your tax returns and paying your taxes. Importantly, separating your business finances from your personal finances is also essential in the event of a business sale, lawsuit or bankruptcy. Comingled personal and business accounts may nullify the protections you receive from your business structure.

3. Seek out professional tax advice and identify the most suitable business structure

Before you open for business, consider enlisting the help of a qualified tax professional, particularly one who specializes in small businesses. Finances and taxes can be considerably more difficult to comprehend when you add a business into the picture; thus, having a professional on-hand to provide assistance can make your life a lot easier, especially as your business grows. Additionally, there are many tax savings available to business owners, and an experienced professional will often know exactly what to look for so you can take advantage of those opportunities.

Certified public accountants (CPAs) are typically well versed in the various types of business structures and can help you determine which one is the most advantageous for your enterprise. Sole proprietorships, partnerships and limited liability corporations (LLCs) are the most common structures for small and emerging businesses. Visit the Internal Revenue Service (IRS)’s website to learn more about different types of business structures, as well as the income tax ramifications that come along with each structure.

4. Create a budget and track cash flow

It’s really important to have a budget in place for both your personal and business expenditures. With a new business, your income will likely be variable (at least for a short period of time) so it’s important to have a plan in place. You also need to pay attention to the timing of your cash flow, which is just as important as the amount you have coming in. Be mindful of your cash inflow and outflow dates to ensure you’re able to keep your business and your personal finances running smoothly.
You may consider opening a line of credit for unexpected cash emergencies, such as late payments from a client or a vendor. That way, you’re always able to pay your bills and expenses in a timely matter.

5. Plan for life after your business

Now that you’re going into business on your own, you may not have a 401(k) plan in place — but that doesn’t mean you shouldn’t be putting dollars away for retirement. As an alternative, you may consider opening up and funding a Roth IRA. You can research and contact an investment advisor, a brokerage firm or a bank to help you start the process.

As your business grows, you may want to consider contributing to a SEP IRA or a solo 401(k) plan — two vehicles that can also allow you to shelter some of your business income from taxes. Both a solo 401(k) plan and a SEP IRA can give you the opportunity to sock significantly more dollars away for retirement, compared to a traditional or Roth IRA. In 2016, you can contribute up to $53,000 to a solo 401(k)1 or a SEP IRA (or $59,000 if you’re age 50 or older), compared to a maximum of $5,500 for IRAs (or $6,500 if you’re age 50 or older). As an entrepreneur, it’s important that you remember to pay yourself first; don’t tie up all of your assets in the business.

6. Have a risk management plan in place

Perhaps the biggest risk you can take when starting a business is failing to protect yourself. After all, this is a brand new venture, which means you are the most important element to its current and future success. Without proper coverage, you’re putting your entrepreneurial dreams at risk.

Make sure you have health, disability and life insurance policies in place to protect the company in case anything happens to you. You may have a family at home, which means you’ll need to purchase policies to protect them, as well. Work with a financial advisor or insurance professional to determine how much coverage you should have to replace your income in the event that you are no longer able to work. As the business grows, your workforce will likely grow with it, which means you may need to consider additional coverage down the line. Click here to learn more about other types of business insurance.

This list isn’t entirely exhaustive, but it can help you start laying a solid financial foundation for your new venture. Still have questions? Think about sitting down with a financial planner to help ensure that you and your family are better prepared for what lies ahead.

 

Start planning today.

 

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional. Hewins does not provide tax, accounting or legal services.
Derec Mieden
Derec Mieden

CFP® | Financial Advisor

Derec Mieden, CFP®, is a Financial Advisor with Wipfli Hewins Investment Advisors in Madison, WI. Derec specializes in comprehensive financial planning for individuals and families, and also focuses on helping younger generations start and stay proactive in saving for retirement.

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Ready to Start That Business? How to Prepare Your Finances

time to read: 4 min