Finance 101: How to build wealth as a small business owner
This is the fourth post in a series on the basics of small business finances. Check out our posts on small business bank accounts, small business credit cards and accounting software. Stay tuned for future posts in this series.
Hopefully you’ve been reading other posts in this series, designed to help you navigate the early steps you need to establish your small business finances. But once you have a bank account, a credit card, an accounting system and your finances are running smoothly, what’s next? While it might take you several years of operation to feel like you’re making a comfortable profit, it’s never too early to think about how you can use your business to build long-term wealth.
Achieving financial security as a small business requires intentional planning. At the most basic level, wealth building involves taking your sustainable business revenue and turning it into income that you invest (both back into your business and into your personal account) and save, leading to long-term wealth.
But wealth is not just income. It also includes financial assets such as stocks, bank accounts and receivables and non-financial assets, such as cars, property, real estate or inventory. You’ll want to have a strategy for building up your assets. Below are some key tactics to follow to build your wealth and secure your future.
- Build your businesses cash reserves: Using part of your business income as a cash reserve can help you maintain positive cash flow and make sure you’re prepared for an emergency like needing to repair a piece of equipment or covering a missed payment from a vendor.
- Consider using a formula to distribute your business income: There are several suggestions out there that can guide what percentage of your revenue you reinvest into your business vs. what you take as salary. One suggestion is the 40-30-30 model—put 40% back into your business, 30% as salary and 30% for savings (including cash reserves and retirement investments). But these guidelines might not make sense for your business. For example, compare within your industry and age of business to help you determine what amount of salary you should draw. A small business counselor at a Small Business Development Center (SBDC) or other support organization can help you make these calculations. Find a resource in your area by visiting our Resource Provider Locator Map.
- Think about future capital needs before you actually need the funds: Part of maintaining positive cash flow and building assets is making sure you have the funds you need to expand or grow. Applying for a loan or seeking other sources of capital while your business is doing well can help you ensure you’re able to capitalize on opportunities to grow as soon as they arise. Don’t wait until you desperately need the money—if you have positive business revenue, it might the right time to talk with your bank about establishing a line of credit or even taking out a loan. Learn more by reading our article, “When you might need a loan.”
- Adopt a workplace-based retirement plan: Offering a retirement plan helps both you and your employees save for your future. Many small business owners don’t offer a plan because they are concerned about the cost, but there are many options available to small business owners, many of which include tax benefits for offering a plan or for contributing to it. To learn more about your options, visit our Retirement Portal.
- Start thinking about what will happen to your business when you retire: Do you plan to pass your business off to a family member, sell it or dissolve it? A business succession plan can help you avoid costly financial or tax issues as you retire, saving you from expensive headaches. The SBA’s guide for “Selling a Small Business and Succession Planning for a Small Business” is a great place to start.
- Seek out affordable support to help you plan for your future: In addition to our own resources, there’s a number of free or low-cost resources out there to help you find help and business advising. Resources include:
- SBDCs, one of the largest networks of business advising services nationwide.
- Other SBA-affiliated resource centers like Women’s Business Centers, Minority Business Development Centers or Veteran’s Business Outreach Centers.
- Local mentors, particularly business owners who have already navigated these challenges. You can use resources like SCORE Mentors to find someone in your area.
As your business grows, you may eventually need to consult a financial advisor, accountant and/or lawyer to make sure your plans for the future are secure, but it’s never too early to start thinking and planning ahead to those days. Some careful planning now can help you leverage your small business to achieve economic freedom and independence.