With finances, it is more important than anything else to recognize before they have to be overcome. As an entrepreneur, it tends to be a point of pride to see your dreams turn into profits. However, the path from dream to reality has a lot of bumps and hurdles and they need to be recognized before they have to be overcome. Randall Castillo Ortega, a financial expert and the founder of SME backer RACO Investment, shares his insight into how entrepreneurs can better manage their wealth.
A lot of entrepreneurs make the wrong choice because they choose to settle on options without consulting specialists. Castillo suggests, “You should have a small network of important contacts that are always readily available to you. You can use the Internet to find an attorney, a bookkeeper, and a tax advisor, for example. Ensure that you keep in touch with these people from time to time so that you may have access to their services when necessary.
It can also be beneficial to not hold excess capital in the business. Diversify the capital and allow it to work for you. Investing in something outside of the entrepreneur’s core business that offers a risk profile that is different from the entrepreneur’s core business can prove to be particularly profitable.
There is no need to liquidate all excess funds when diversifying capital. Castillo explains that the business must be prepared to weather the storm, which will undoubtedly occur at some point in the future. It is recommended that you maintain a liquid reserve of between six and twelve months of expenses at all times.
Additionally, ensure you have the correct insurances, such as disability insurance and health insurance, and make sure you have an emergency planning strategy in place in case of those unexpected eventualities that everyone hopes will never happen.
There is constant change in tax codes and it can sometimes be very difficult to keep up with them all. Incorporate tax-advantaged retirement plans into the company to provide an extra cushion to the business, such as 401(K) and IRAs, so that the company will not be paying more than it should be. Consult a tax professional to ensure you are not paying more than you should be.
In the same way that a business owner dissects income statements, balance sheets, and cash flow projections, the same can be done for personal finances. It is important that you take care of your expenses to create a steady living environment in your own life by increasing your reserves and investing in retirement accounts and other resources. Castillo points out that by addressing your expenses, you can increase your savings and investments. Having personal finances that are not accurately addressed can have a negative effect on your business.
Save between 10-20% of the gross income for long-term goals and invest the rest in a market-oriented investment. You might think you’ll profit more than in stock markets; however, this is shortsighted. Save between 10-20% of the gross income for long-term goals and invest the rest in a market oriented investment.
In order to be prepared for future income interruptions, business owners and entrepreneurs should prepare for them three years in advance of starting their business. Successful entrepreneurs and business owners prepare for turbulent times of business launch.
Prepare a business plan in order to ensure that there are sufficient resources available to keep it running while it is being built. “Typically, successful entrepreneurs set aside three years’ worth of living expenses before starting a business,” says Castillo.
Entrepreneurs often have their business as the most valuable asset on their balance sheet. There are rarely any formal succession plans in place, which can lead to a “what now?” scenario down the road if they do not have one in place. Invest less in making investments that may or may not provide you with rewards and focus more on creating a proper succession plan.
Similarly, as you focus on building effective frameworks in your business, you should also focus on developing good habits when it comes to managing your personal wealth. Castillo says that it is crucial to be disciplined and dedicated to setting aside money that is untouchable. “Running a successful business also requires discipline and dedication,” he adds.
As a final point, it is important to separate business and personal finances. Personal savings are meant to be used for the family home; if you take something away from them, you are depriving them of something they need.