Financial tips for entrepreneurs

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Last updated: June 18, 2024

Running a business is no mean feat. It’s time and energy consuming, so it’s no surprise that personal finances can easily be neglected when you’re focusing on growing and nurturing your company.

But, as a founder or director, it is important to look after your own finances since having a plan allows you to factor your own security and reward in. It can give you confidence that the hard work is worth it, not just for your business goals, but for your personal ones, too.

On that note, we have summarised a list of 7 financial tips for entrepreneurs to help you make the most of your earnings.

1. Separate your personal and business finances

You likely already have separate business and personal bank accounts, which is good for maintaining clarity. However, do you differentiate your business and personal financial plans?

As the owner of the business, it is useful to have clear financial goals for yourself, including a personal cash flow, so you can understand how much money you need now and in the future.

Consequently, you can understand how much you want to extract from and/or reinvest back into your business in the future.

2. Leverage pension opportunities

Some entrepreneurs believe the sale of their company will act as a retirement fund, which may well work out, but is also a risky strategy. It may take longer than you anticipated to sell, or you may want to gift shares to family or employees. Finding the right buyer is another hurdle – you want them to align to your values whilst also paying the right price. You don’t want to feel rushed into a sale.

Contributing to pension pots helps build a more secure retirement that isn’t intrinsically linked to your business. It’s also a tax-efficient way to save money since you gain tax relief at the marginal rate on money invested into the pot, interest and returns are tax-free during investment, and 25% of the money is tax-free on withdrawal. What’s more, you can make employer contributions which are then deductible against corporation tax.

SIPPs (Self-Invested Pension Plans) can be invested in a variety of funds so you can also benefit from growth in the market such as in equities (stock and shares), bonds, gilts and more. 

Working with a financial planner and business accountant can ensure you choose a profitable pension and benefit from the tax reliefs available to you.

3. Consider investments outside of your business

Whilst nurturing and growing your business is naturally a priority for you, it’s important to consider your overall investment portfolio. Putting all of your eggs in one basket, in this case, your business, is a high-risk strategy and means you miss out on potential returns elsewhere.

Splitting your wealth between your business and other asset classes such as equities and bonds allows for a diversified portfolio that mitigates risk. How much should be allocated to each asset class is down to individual circumstances, and this is where a financial planner can help. Diversifying your investments could help to cushion the blow to your long-term finances if your business doesn’t perform quite as well as you hoped. Depending on your business' cashflow, it could be worth investing some of the excess profits to give them the opportunity for long-term growth.

We’ve explained diversification in more detail here and explored the benefits of investing in the market in the following blogs:

Market downturns can lead to up years

How to invest wisely

4. Create an emergency fund

Running a business can be a tumultuous process, with uncertain outcomes apparent throughout your entrepreneurial journey. Wherever possible, you want to protect your cash flow.

Having a personal emergency fund provides a safety net so you don’t need to take money out of the business for events like home or car repairs, illness, or a sudden change in income.

It also means that you can reinvest profits back into the business where needed without feeling the pressure to take lump sums. You can then focus on business growth during pivotal times such as the early stages of business or when you need to scale your team, for example.

For a personal emergency fund, we suggest around 6-12 months of essential spending. However, if you intend on taking time out of work in the near future e.g. starting a family, we’d suggest around 1-3 years' worth of essential spending.

5. Lean on the experts

Building a business on a solid financial foundation is the key to success. If your expertise is in areas outside of finance, use the knowledge of specialists to bolster your strategy. Having a network of experts around you alleviates the stress of knowing whether you are making the right financial decisions.

Working with a financial adviser, you can review your financial plan regularly to ensure it still aligns with your business and personal goals. Using cash flow modelling, you can plan for the future, review how much income you really need from your business, and ensure it is invested wisely to leverage returns. They can also introduce you to trusted peers such as solicitors, accountants, business consultants, and mortgage advisers. With the right team, you can grow your business with confidence and know you are looking after yourself and your loved ones in the process.

6. Ensure you are protected against uncertain scenarios

If you run your own business, you are reliant on yourself for sick pay rather than an employer. So, it’s important to put measures in place for times when you may be off work due to illness.

Having the right insurance policy in place provides financial security during such events.

There are two main types of protection in this scenario:

Income protection

Income protection insurance pays you a regular income if you can't work because of sickness or disability, and continues until you return to paid work or you retire (as long as you are still within the policy term).

All providers offer slightly different policies and pay out varying amounts of money. However, typically, pay outs can be from 50 - 70% of your usual gross earnings.

Critical illness policies

There are various types of critical illness policies out there, but generally they pay out when you are diagnosed with or undergo specific treatment for a specific condition.

If you claim, you receive a tax-free lump sum to cover medical costs, loss of income from being unable to work, and potentially alterations that may need to be made to your home during or following an illness.

We’ve shared more on the types of insurance you may need here and also busted some common myths about insurance here.

7. Plan your exit in advance

Thinking about exiting your business well in advance of when you plan to do so can enable a smoother transition.

If your plan is to sell your business, it pays to work out the figure you would be happy to accept – this should be how much you would need from a sale in order to achieve the lifestyle you want and any other financial goals you have such as gifts to loved ones.

This is where a financial adviser can help, using cash flow to predict the amount of income you need over a number of years to afford your outgoings. They will factor in your business sale proceeds as well as pensions, savings and investments. They can also look at potential scenarios such as new business ventures and their potential impact.

At the end of the day…

Sometimes increasing your wealth is not just how much money you make, but how you manage it. Wealth isn’t just about numbers in the bank, it is ensuring you feel fulfilled as a business owner, can reap the rewards of being an entrepreneur, and have peace of mind in your decisions.

This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth. The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.