Whether you’re envisioning or exiting your venture, financial management for entrepreneurs and self-employed workers is nuanced, often requiring additional planning above and beyond “normal life.”
Here are three stages of financial management for the self-employed, with advice for each phase.
1. Planning Something New
If you’re pivoting towards an entrepreneurial career, consider the following:
- Count the costs and benefits
When entertaining the idea of self-employment, create a traditional pro/con T-Chart and document your thoughts about the anticipated costs and expected benefits. Address both lists through research, education, and consultation with fellow entrepreneurs.
- Set proper expectations
With the right expectations, you can handle the headaches of self-employment, such as unpredictable income, mounting expenses, and inconsistent cash flow.
Consider…
- How much money do you have access to?
- How much are you willing to use to get your endeavor off the ground?
- What do you expect to make, and how much will that cost?
- What will you do if things don’t work out as quickly as you would like?
There is no magic in business. Only hard work and planning with the right expectations can keep stress manageable.
- Discuss your plan with loved ones
People often believe that not answering to a boss means they will have more time, but entrepreneurs and self-employed workers answer to the most challenging boss – themselves!
The extra time, money, and stress of working for yourself can affect your relationships. Discuss your plan with your loved ones before making a change.
- Find a good CPA
Tax challenges surprise many self-employed workers. Find a CPA familiar with self-employment and willing to invest time and expertise into helping you succeed.
Taxation is an expense that, if not planned for, can put a big dent in your anticipated earnings.
- Know what to do if you run out of money
Have a plan in advance for unexpected expenses, and budget appropriately for any savings you intend to use. Too much debt is worse than not making enough in the early stages.
2. Putting in the Work
Once you start doing the work of an entrepreneur or self-employed worker, keep in mind the following financial management tips:
- Avoid going too fast and doing too much
People believe they have to “go big or go home,” and while that may be important later in the game, initially, it’s most important to have enough money to just keep going.
Once you start making money, set some aside for when an inevitable slowdown occurs.
- Be flexible
If an activity is unprofitable, try something else. For example, some entrepreneurs will market themselves into bankruptcy using faulty tactics if they’re not careful. Be intentional with what you spend, and don’t keep spending money on something that has proven unfruitful.
- Collect on outstanding invoices
Create ways for clients to easily pay you, and do not give them more time unless necessary. Nowadays, it’s inexpensive for even the smallest business owners to utilize direct, on-the-spot payments.
- Track progress and make a plan for growth
Know the cost of everything that goes into the margin we call profit. At least quarterly, track your costs versus benefits (profits). Then, decide how quickly you want to grow and duplicate your efforts.
Also, check your savings balance or access to borrowed money. Don’t borrow until you have proven your concept will provide a profit and you know what it takes (even if it takes a year or two to figure it out!).
- Consider retirement savings options
Take stock of your retirement savings options as an entrepreneur or self-employed worker. The IRS outlines some choices in their resource: “Retirement plans for self-employed people.”
This includes simplified employee pensions (SEP), solo-401(k)s, and a savings incentive match plan for employees (SIMPLE IRA Plan).
A financial advisor can help you decide which option is best for you.
3. Preparing to Exit
The mechanics of retirement can look different if you work for yourself.
For example, as an entrepreneur, “retirement” money may be what you invested to make your venture possible, with hopes of a higher yield over time. If your math does not add up to make this so, reconsider using your retirement funds for this purpose.
If you invested in a retirement savings plan, understand what it looks like to distribute funds from the plan and how you will do so during retirement. A financial advisor can help you strategize your income and spending.
For some entrepreneurs, exiting also means succession planning. To understand the details of creating a succession plan for your business, review the article on Retiring Business Owners – Plan for Succession.
Financial Management for Entrepreneurs and the Self-Employed
Opinions abound about how to work for yourself, but as financial advisors, we believe it’s foundational to plan well, build well, and retire well.
With the help of an expert, financial management for entrepreneurs and self-employed workers does not have to be too complicated. Many of Credent’s advisors have been entrepreneurs or self-employed workers before, so they can help you navigate the complexities, seize the opportunities, and achieve your goals.
To discuss the impact of entrepreneurship or self-employment on your financial plan, reach out to a planning expert using the form below.
Contributing Source: Internal Revenue Service. (2024, August 20). Retirement plans for self-employed people. IRS. Retirement plans for self-employed people | Internal Revenue Service (irs.gov)