7 Key strategies to building wealth for small business owners
Whether you are a seasoned business owner or a first-time entrepreneur, it’s never too early to consider approaches to building long-term wealth through your small business. Although there are many tactics to achieving financial security and building wealth, here are some key strategies for small business owners to consider.
Carve out time to plan with the end goal in mind
As many entrepreneurs might know, working on your business and not in your business should be the ideal goal. But what exactly does this mean? Small business owners wear many hats and it often seems there aren’t enough hours in the day to get everything done. However, setting aside even 15 minutes a day to reflect on your business performance can have positive effects. Allow yourself to focus on strategy, rather than get bogged down with the day-to-day details.
There are different approaches to structuring this time of reflection, so it may be helpful to set parameters on specific days of the week, keep a running journal of your ideas, or imagine you are talking to your future self about the goals for your small business. To use this time most effectively, first identify your goals: Do you want your business to run without you? Do you wish to expand to a new location by a certain date? Do you anticipate future needs and can plan for how you will capitalize on opportunities as they arise, whether it's a new hire or taking out a loan?
Once you’ve prioritized your goals, put together a detailed and concrete plan to make them a reality.This foundational practice will allow you to build a dynamic long-term strategy and start to build out systems that allow you to increase the time spent working on improving your business.
Here are some questions that may help you delve in deeper: How much time and capital am I investing into different areas of my business? What are some areas that need more or less time and/or capital dedicated to them? What is bringing or not bringing value to my business?
Build an emergency fund
Once you start a habit of setting time aside to reflect and plan for the future, building an emergency fund should be your next priority.
By building a liquid emergency fund, you and your small business can be ready for unprecedented emergencies and avoid external financing. It is generally advised to set cash aside to cover 3-12 months of expenses. Consider your industry and speak to an advisor at a Small Business Development Center (SBDC) to help you calculate an appropriate emergency fund.
Create a budget for your small business
Once you’ve built your emergency fund, it's time to create a budget. A standard budget follows the 40-30-30 rule: 30% goes to your salary, 30% goes to your savings and 40% is reinvested into your business. There is no one-size-fits-all budget, so make sure you create one that works for you and your business. You should take into account the standard for businesses within your industry, or businesses similar to your size and age.
Once you create a budget that works for you, stick to it. Even if you’re tempted to reinvest all your personal savings into your business, this is not a good long-term strategy for building wealth.
Keep your personal finances separate from your business finances
Oftentimes, the line between you and your business can be blurred as you might be running your business from your home or spending much of your waking hours on it to get it off the ground. This is why the separation of business finances and personal finances aren’t always clear. It might be tempting to use personal funds to boost your business, but this is not the best way to grow your business.
Although your personal finances and business finances are linked, it is crucial to keep them separate. This is for several reasons. First, taxes. Keeping business expense receipts separate can save you a lot of stress when it's time to file. Second, personal liability. When your business first starts out, you might inevitably be the personal guarantor for leases, loans, or lines of credit. But your goal should be to eventually avoid these personal guarantees as much as possible. To learn about separating your personal and business finances, click here.
Find experts and mentors in your field
No matter your experience level as a business owner, you will, at times, find yourself in unfamiliar territory. This is why it is key to develop a circle of contacts to have at your fingertips for business assistance and advice. Stay in touch with your financial advisor, accountant and/or lawyer to ensure you have the right protections and plans in place.
Additionally, you should seek out local mentors who have experience navigating small business challenges. Organizations such as SCORE, Small Business Development Centers, and SBA-affiliated resource centers like the Women’s Business Centers, Minority Business Development Centers or Veterans Business Outreach Centers are free or affordable options to seek out sound business advice. Check out some tips on how to make the most of your relationship with your mentor here.
Put a succession plan in place for your small business
You want to make sure your business can still run successfully without you in the event that you retire or decide to take a more hands-off approach to business ownership. Traditional investment and retirement strategies are essential, but a succession plan can set you up in the long-term.
An estimated 66% of small business owners don’t have a succession plan in place, which can hamper your ability to plan for the future. Without clear direction, an abrupt exit from your business can negatively impact employee and customer relationships. So spend some time identifying if you plan to pass your business to a family member, sell it or dissolve it. Learn more about succession planning options here.
Take advantage of tax breaks and incentives available to your business
Although establishing succession plans are at the foundation of financial wellness as a small business owner, taking advantage of tax breaks and incentives can help you get some extra savings for the future. Below are some of the tax credits available to small business owners.
It’s not too late to take advantage of the Employee Retention Tax Credit if your business was founded before 2020.
If you are considering investing in a company car, consider buying an electric car, which could make you eligible for a credit of up to $7,500. See the requirements for this credit here.
Your business may be eligible to claim the Work Opportunity Tax Credit if you have recently hired certain employees, such as veterans, individuals with disabilities, or the previously incarcerated.
If you own a pass-through business, you can qualify to reduce your income tax rate by 20%.
Additional incentives may be available in your state or local area. Make sure to work with tax professionals to take advantage of all of the opportunities available to you.