Entrepreneurs are often regarded as risk-takers, visionaries and masters of opportunity. Despite the bold moves and business victories, many struggle with something more mundane but equally crucial: their finances.
Many people are surprised by this irony. If you can build a business, shouldn’t managing your own money be easy? In truth, entrepreneurship requires a mindset different from good financial habits. The reason? The traits that help you succeed in business, like risk tolerance, optimism and reinvesting aggressively, can undermine your finances.
Here’s why many entrepreneurs fail at personal finance, and how to avoid their mistakes.
Related: Improve Your Money Skills in 8 Minutes a Day
Blurring the lines between personal and business finances
A common financial blunder entrepreneurs make? Not separating business and personal accounts.
In fairness, you shouldn’t be too harsh on yourself if you made this mistake. During the early stages of your business, it may seem harmless to dip into your savings to cover a marketing campaign or use your business credit card to buy groceries. Over time, though, this blurs accountability. It becomes more difficult to track income, expenses, taxes and profits. It can lead to the illusion that your business is doing better than it is — or that you have more money than you actually do.
How to win: Make sure your business has its own bank account and credit card. It’s also important to pay yourself a consistent income, even if it’s modest initially. In terms of compensation, you should treat yourself as an employee of your company. Doing this creates a sense of discipline and clarity in your finances.
Gaps in financial literacy and knowledge
Although some entrepreneurs may be able to launch and grow businesses with limited financial knowledge, a strong understanding of personal and business finance is crucial for long-term success. Most people bootstrap their businesses, use personal savings or borrow from friends and family without understanding the financial implications.
To succeed as an entrepreneur, you need to understand the basics of personal finance.
- Cash flow management. Entrepreneurs need to keep track of how money enters and leaves their businesses. According to a Wilbur Labs survey, over one-third of founders believe running out of money contributed to their failure.
- Budgeting and forecasting. Entrepreneurs can manage debt, control costs and launch new products confidently if they can create a budget and stick to it.
- Investment decisions. Entrepreneurs must assess the risks and returns when investing profits or growing personal savings to make strategic decisions.
- Securing funding. A solid financial plan and understanding of your numbers will give lenders or investors confidence. It will help articulate your vision and demonstrate your responsibility.
How to win. Become familiar with financial concepts while building your business. Take advantage of entrepreneurship courses, books, podcasts, and communities. If you are not sure about something, consult a financial expert. You don’t have to become a CPA. However, you must speak the language of money well enough to guide your business effectively.
Having inconsistent income results in irregular savings
Unlike salaried employees, entrepreneurs aren’t paid on a regular schedule. Because of this volatility, saving only when times are good and overspending when times are bad can be tempting.
Eventually, this feast-or-famine cycle leaves you unprepared for emergencies, tax season or retirement.
How to win. Based on your lowest income months, create a baseline monthly budget. Using that conservative figure, automate savings. Also, ensure an emergency fund covers your expenses for at least 6–12 months. And, once a windfall occurs, allocate a percentage to long-term savings and investments.
The overreliance on business for wealth
Entrepreneurs often assume that their business is their retirement plan. In other words, they expect to either sell it for a large sum or continue to earn income from it for the foreseeable future.
However, businesses, like markets, are unpredictable. Specifically, burnout, health issues or economic downturns can disrupt your exit strategy. As such, if all your wealth is invested in your company, your future is at risk.
How to win. Make sure you diversify your wealth. Early on, start investing outside of your business. It could be an IRA, brokerage account, real estate, or annuity. Remember, while your business can be your primary source of wealth, it shouldn’t be your only one.
Unexpected tax surprises and mismanagement.
Taxes can be highly complex for self-employed people. When quarterly payments are missed, deductions are misunderstood, or liability is calculated at the last minute, penalties, stress and cash flow problems can result.
How to win. Consult an accountant who understands the industry and business structure of your company. Ideally, you should also set aside taxes monthly in a separate account. You may even consider using a software program that tracks income and deductible expenses in real time. Remember, tax planning is not something you should do once a year; it should be something you do throughout the year.
Neglecting retirement planning
Retirement is rarely at the top of entrepreneurs’ minds. We’re constantly launching new products and winning new contracts. In the absence of an employer-sponsored 401(k), doing nothing is often the default option.
Retirement, however, doesn’t wait. The earlier you start, the more your money can grow.
How to win. Learn about the retirement accounts available to entrepreneurs, including Solo 401(k), SEP IRAs, and SIMPLE IRAs. Investing in these accounts can be tax-efficient and offers high contribution limits. Further, as your business grows, automate small monthly contributions and increase them.
Related: Hidden Gems: 15 Unexpected Ways to Grow Your Retirement Nest Egg
During growth spurts, lifestyle inflation occurs
Whenever your business takes off, it’s tempting to upgrade your lifestyle. You’ve earned it, whether it’s a nicer car, a bigger house, or more travel.
Lifestyle inflation, however, can eat away at your profits and prevent you from accumulating lasting wealth. Even worse, if your income dips later, you may be overextended.
How to win. Rather than focusing on your best year, set lifestyle boundaries based on your average income. Using the 50/30/20 rule, spend 50% on needs, 30% on wants, and 20% on savings and debt repayment. It is also a good idea to save more during times of high income. As a result, you won’t be financially squeezed during leaner times.
Not seeking professional financial advice
Entrepreneurs often pride themselves on being DIYers. While that’s admirable when building a product, managing finances is risky.
Unless you have professional advice, you may overlook tax strategies, investment opportunities, or risk mitigation tactics that could save or earn you thousands of dollars.
How to win. A financial advisor should be part of your entrepreneurial team. Business owners should seek out fiduciary advisors who specialize in their needs. In addition to helping you plan your cash flow and manage risk, they can help you create long-term investment strategies and plan for retirement. In addition to managing your money, a good advisor will help you protect your freedom.
Related: Smart Guide to Interviewing Financial Advisors
Think like a CFO
As entrepreneurs, we are used to thinking like CEOs — visionary, risk-tolerant, growth-oriented. However, your personal finances need a CFO’s mindset: cautious, strategic and detail-oriented.
Separating business and personal finances, saving consistently, diversifying income streams and planning for taxes and retirement can provide financial stability and peace of mind.
You’ve worked hard to build your business. So, ensure you’re also creating a financial future that will last long after the hustle dies down.
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