Financial Advice For Anyone Launching A New Business

Post By: Admin / USA Frugal Club

Many workers have tapped into their entrepreneurial skills deciding to ditch their traditional job to launch their own businesses. This exciting financial venture can come with some risk in balancing personal finances with funding the launch of a new business. 

There is potential for launching a new business, but entrepreneurs should also be aware of the financial risks that can impact their personal finances. Business entrepreneurs might be excited about the potential of the new venture but should prepare to face obstacles to achieve success.   

Launching a business comes with personal financial risks at the start including losing some (if not all) of your savings, your assets, and income. This financial risk can be managed carefully by entrepreneurs to launch a business with potential while keeping personal finances in mind, especially in the beginning. 

Entrepreneurs should prepare to make a financial sacrifice as a majority of newly launched businesses tend not to make any money for the first few months. In some cases, some businesses require more time to make any money even if the entrepreneur dedicates full-time focus to the venture. 

It’s recommended for entrepreneurs to start ramping up personal savings before launching a business that should be considered untouchable and can only be used for the business. The next phase of launching a business is what to do when it starts generating revenue. 

Generating revenue from a newly launched business might seem to be the end goal but is just the beginning of growing the business to ensure future success. Entrepreneurs should start setting aside revenue with the goal of saving enough to fund up to one year’s worth of business expenses. 

This can help separate personal financial responsibilities for entrepreneurs from the financial responsibilities of the business. One of the biggest mistakes among entrepreneurs is treating their business like a bank account by taking money out as they need it which can negatively impact the stability of the business finances. 

One piece of advice that every entrepreneur should consider is remembering the business is not a nest egg. Some entrepreneurs treat their business as their primary retirement asset with plans to sell the business as a form of retirement or build a profitable business to live on comfortably while someone else is placed in charge of operations. 

Though both of the previous scenarios are possible, nearly all finance planners suggest entrepreneurs take the time to set funds aside for retirement. The future of a business is uncertain, but entrepreneurs can have a sense of financial security in the future.  

Some entrepreneurs think they should put off being on payroll, but this is important to start once they can draw a paycheck from the business. Entrepreneurs should start putting money into a retirement account, even if it’s just a small amount it’s better to start making a habit of it early on. 

There are different savings accounts for entrepreneurs to consider depending on the financial goals that work best for them. The most common options include a traditional Individual Retirement Account (IRA) or Roth IRA, a solo 401(k), and a SEP IRA. 

The most traditional option for savings is an IRA or Roth IRA which can be determined by financial goals and accessibility to funds. An IRA can be a desirable option for entrepreneurs contributing $500 or less monthly to the account for those under 50 contributing $6,000 annually and $7,000 annually for people over 50. 

Having a Roth IRA account is similar, but contributions are added to the account after-tax with the added benefit of not having to pay tax on the growth or qualifying withdrawals. Choosing between these account options can be determined by the tax bracket. A traditional IRA is best for entrepreneurs in a lower tax bracket when they retire and those who are destined for the higher tax bracket can benefit from a Roth IRA. 

Another account option for entrepreneurs to consider is a Solo 401(k) that requires a contribution of up to $20,500 with some brokerages offering a Roth 401(k) option with the account. A Solo 401(k) also allows for profit-sharing contribution to the account as a business owner for up to $40,500 (or 25% of eligible profits) with a potential total of up to $61,000.

For entrepreneurs that skipped building retirement savings during the stages of building the business, they can consider a Simplified Employee Pension plan (SEP). Entrepreneurs can contribute up to 25% of their income or $61,000 annually (depending on which figure is less). Opening on SEPIRA has a deadline on Tax Day that gives entrepreneurs time to open an account to make contributions counting towards the taxes of the previous year. 

All entrepreneurs face financial risk launching a business but knowing the basics of finance can help prepare them for success and reduce risks in the future. Being financially secure is a great start for any entrepreneur and can pave the way for a successful venture.