On the topic of net worth, in Part I, we focused on establishing the right mindset to begin taking the steps toward understanding and building your personal net worth. In Part II, we identified what you can do to set yourself on the path to creating the level of net worth that you personally desire. Now, let’s discuss net worth as a small business owner.
For a young business, it’s important to manage cash flows and debt levels.
I’ve heard many entrepreneurs complain that they have no net worth because all of their assets are tied up in their business. There are many elements to building value or worth in your business. However, the basic principles of building your personal net worth as a business owner are not that different from the strategies used in personal finance.
For a young business, it’s important to manage cash flows and debt levels. Development costs can be strenuous, especially in the beginning. Planning for those expenses by creating a financial forecast of what you think you’ll need for general expenses as well as unexpected emergencies is a good way to prepare yourself for both the expected as well as the unexpected. It’s the same approach that you take when managing a personal budget, but it’s important to keep these two methodologies separate. Although everything you do may benefit your business and vice versa, co-mingling your personal finances with your business financials may create confusion and difficulties down the road. Separate your accounts, and pay yourself out of your business as definitively as you invest into it.
Plan ahead, because this will impact your business as well as your personal wealth. One effective way to plan ahead is by planning for your retirement. Similar to an Individual Retirement Plan (IRA), there are retirement plans that you can establish as a business owner; many of which have higher contribution limits than a traditional IRA.
Growing your net worth takes time, patience and a good consistent strategy.
Although it may take time before you really start paying yourself in your business, it’s wise to focus on some form of compensation to help you build your net worth. Putting money away for retirement is a common way that business owners can build their personal net worth.
An Individual 401(k) or Simplified Employee Pension (SEP) IRA are two examples of plan options for individual business owners who are sole proprietors, while SIMPLE IRAs and Keoghs are plan types that allow owners and employees to make pretax deferrals directly from their wages into an account where it has the ability to grow tax-deferred until retirement.
Succession planning for your business is another way to plan for the future. Creating a succession plan, while you build your business in a way that makes the best sense for you can help guide your wealth management decisions. This also ties into the estate planning structure that you establish for your personal assets. Consult with a financial professional and a tax advisor to understand the type of retirement plan that is right for your business. You may also want to consult with a qualified attorney and estate-planning specialist to ensure that your goals and wishes in this area are properly reflected as well (this includes your plans for your business).
Finally, remember to pay yourself. Although it may take awhile, and unlike personal finance, you may not be able to pay yourself first; once your business has grown to a profitable level, and you’re generating consistent revenue, take pleasure in paying yourself so that you can continue to apply the basic principles of building personal net worth as you did for your business.
Growing your net worth takes time, patience and a good consistent strategy. That should be something that we all take our time to do. After all, you and your business are most definitely worth it!
Note: To learn more about different plan types go to Investopedia.com