Financial Strategy and Support for the Self-Employed

Being your own boss, you wear many if not all the hats. You are the head of operations, the marketing director and the chief sanitation engineer. Of all of the roles that you have, financial director is the most important. After all, your product will never see the light of day without the finances to back it. A well-run company, even if you are its only employee, has enough money to pay everyone, generate a profit and throw cash at expanding its market. Here’s a financial strategy for how you can do it.

Use the Right Company Structure

If you are within the first five years of your business, the odds are that you are filing as a sole-proprietorship. This means that there is no significant distinction between you and your business. Business profit and personal income are the same and your business’ liabilities are yours, including lawsuits. The IRS lists five different business structures, each having a unique combination of tax rules and liability protection. Corporations make it easier to find backers for your business and they offer the greatest protection against liability, but there is the potential of double taxation if you are not careful. Selecting the right one is the first step to financial health.

Diversify Your Revenue Stream

The dismal statistic for small business failure is actually a myth. Most start-ups do not fail, but they do transform, e.g., a baker finds that the novelty dog treats sell better than the cupcakes and suddenly a new business is born. As a small business owner, you cannot afford to put all of your eggs in one basket. Generate more income by selling for Amway, freelancing on Guru and creating several different product lines until you get an idea of your cash flow and revenue streams. After that, you can scale down and remove lines that do not work for you.

Pay Yourself

There is a difference between your pay and the company’s profit. Sure, the IRS sees them as the same for a sole proprietorship, but from a managerial decision point of view, they are very different. As an owner, your goal is to run a successful company that will eventually be independent of your sweat labor. Figure out a salary that is appropriate to your primary job function. This way, as the business grows, you can hire someone to do your function and live off of the company’s profits.

Keep Investing

The rules of a small business are the same for a 9-to-5 worker. Without a retirement plan, you will be stuck working for the rest of your life. There are special savings plans for entrepreneurs that include 401(k) and annuity insurance programs. On the insurance front, a health savings account (HSA) is a good way to combine your health insurance plan and a pre-tax savings program. Like any other person in the workforce, see a certified financial planner for the best fit for you.

Know When Leveraging Is Good

In business, debt is not a bad thing, as long as it is properly managed. Leveraged debt as a financial strategy can help a new business get off of the ground and established companies expand. Typically, you will want to look at your return on investment (ROI), which will tell you how much revenue will be generated from the loan that you get. Use leveraging wisely to grow your business.