There are many benefits to entrepreneurship. You get to be your own boss, work in a business you're passionate about, and reap significant rewards if that business turns into a success. Unfortunately, entrepreneurship often entails significant risk, and without proper planning, a failed business can also tank your own finances.
No one wants to consider the possibility of their business failing. Entrepreneurs that don't have a backup plan often fall back on the excuse that they want to be fully committed to their business, but that's poor logic. You can commit to a business and still prepare to be financially stable if that business goes under. Many great businessmen failed several times before landing their big successes.
A good backup plan actually allows you to commit to your business even more, as it frees you up from worrying about what you will do if the business doesn't work out. Here are a few tips for how to set yourself up to survive the worst-case scenario of your business going under.
1. Keep Personal And Company Finances Separate
There should be a wall of separation between your own finances and the corporate bank account. This will ensure that you save money for yourself and don't lose it all on the business. More importantly, it protects you from liability in the case of legal trouble or corporate debts.
Your business should be incorporated as a distinct legal entity with its own finances. Otherwise, you run the risk of having to pay any debts the company incurs out of your own pocket.
2. Keep Yourself Marketable
You may not intend to work for someone else ever again, but it's still a good idea to keep that resume up to date while working on your own business. Keeping a record of your role within the company can help give potential employers context for what skills and experience you might bring to the table.
Online classes and certifications are a great way to keep your qualifications up to date while on a tight schedule. These classes will let employers know you haven't fallen behind in your field while working on your business. Most will also be very impressed by your dedication in finding time to work in those classes.
3. Pay Yourself What You're Worth
Define your role in the company, and pay yourself an appropriate salary for someone in that role. Many entrepreneurs will only pay themselves the bare minimum they need for survival at first, but this can be a dangerous habit. Not only does it put your personal finances in jeopardy, it also creates a misleading picture of your company's finances.
Paying yourself an appropriate market rate gives you the resources to cover basic expenses and save up money. It also allows you to factor in how much capital you will need to finance your business long-term, and it saves you from drastically changing your cost structure a few years down the road.
Drew Hendricks, Inc. contributor and CEO of Infographics.Space says, "It's best to have plenty of money saved when starting a new business so when you're paying yourself a small salary it won't affect your life outside of work."
4. Know Your Personal Financial Goals
You're more likely to come out of your business in good shape if you have clearly defined goals for your personal finances going in. These are distinct from any business goals and should only reflect what you want your own bank account to look like.
Personal financial goals might be saving up enough emergency money to provide for your family for a year, or building towards retirement. Knowing what you want from your personal finances will help you structure the cash flows from your business in the best way possible.
5. Talk To Professionals
No matter what your business looks like or what your financial goals may be, it's always useful to talk to a professional financial planner. A financial planner can give you advice on investing the money you have saved up, budgeting your resources to save the maximum amount, and structuring your finances to reduce your tax burden and protect yourself from liability.
Many entrepreneurs don't take the step of talking to financial planners, as they don't believe they have enough time. In reality, it takes very little time to talk to a professional and create a financial plan (after all, handling money is what they do all day). Considering that a good financial plan can mean the difference between stability and going broke, there's no sound reason not to take a couple of hours to talk to a professional and consider at least working with them to prepare for worst case scenarios.