Have you just built your startup? Congratulations on this big step you’ve taken in becoming an entrepreneur! Starting your own business could be the door to your financial freedom, but if it doesn’t work out as you planned, it will ruin your personal finances.
When you build a business, it is important to have a smart plan to ensure your personal wealth is protected in the event that your business is held accountable for something gone wrong. Here are seven tips to protect your personal finances from business risks.
1) Put your eggs in many different baskets
You need to be prepared for every different scenarios, don’t invest all your money in your business. Allocate your money in many different places, such as company’s assets, cash, investment and emergency cash cushion.
Emergency cash cushion is required so that you can fall back on if you need it. If bad things happen, you already have money set aside to keep you afloat during the tough times.
You need a much bigger cushion especially if you have no other income stream. Prepare at least 12 months of your expenses in emergency cash cushion if you don’t want to be stressed out about your finances while you’re running your business.
2) Hope for the best and plan for the worst
In business you must hope for the best and plan for the worst. Be optimistic, but when shits happen you just have to be prepared. Don’t take all of your money out of your checking accounts to fund all your operational businesses costs. So if one of your business fail, you have other money to continue your business.
3) Separate your business and personal expenses
Keeping your business and personal expenses separate is a must when you are starting a business. In tax reporting, your business expenses is simply deductible from your business income. And the more deductions you have, the less tax you will pay. How to separate your business and personal expenses? You can simply open a separate business bank account.
4) Learn how to manage your cash flow
The only reason a company fails is because it runs out of cash. In every business, cash flow is a king and documentation is a queen. Having manageable cash flow is the number one financial planning lesson you should learn when running a company. If you don’t know where your money comes from or where it is going, you put yourself at risk. So how can you manage your business cash flow? Create your budget and stick to it.
5) Get some help
If you are an entrepreneur, don’t forget to track your business expenses and keep their documentations. It is very important to have a simple accounting system like Zahir to record and track your spending each month so you don’t have to scramble for information when you need it. Or you can use free financial tools if you don’t have budget to invest in accounting software.
If you find yourself having trouble finding the time, you can always hire a freelance bookkeeper to help you out.
Why you need it? You need it for the tax time, your information may get more complicated requiring the services of an accountant around tax time.
6) You’re Adequately Insured
There are a lot of things that could go wrong when starting a new business, so it’s a good idea to speak with a financial professional to determine where insurance policies may be helpful in mitigating certain risks.
Disability insurance is one of the most important forms of insurance for business owners. Disability insurance protects your greatest asset: your ability to make income. There are other insurance options that you can consider. It also depends on the type of business you’re running.
7) Don’t forget the tax
Taxes are very important thing in your business. How your business is structured affects how your business pays taxes. Discussing your taxes with a tax expert will help you to ensure you’re setting up your business structure properly and maximizing your deductions.
Well, I hope these tips will be useful for you and you won’t repeat some of the common financial mistakes many young entrepreneurs make. It’s your time to embrace your business in a smart way !