November is National Entrepreneurship Month. In 2016, President Obama established the month by Presidential Proclamation to “celebrate entrepreneurs who serve their communities and bolster our economy.” According to a report by the Global Entrepreneurship Monitor, 27 million Americans are running or starting their own businesses. Small businesses and start-ups are valuable for the economy and can be positive for your career as well. While there is no perfect time to start your own business, here are some tips to consider if you are ready to launch your own company.
Write a business plan
Your first step needs to be writing a business plan. It is the foundation and backbone of your new company. A business plan is like a roadmap for you to follow to run and grow your business. It is also a key element for securing funding from investors if you are looking into that option.
Set a budget and financial goals
When starting your own business, it is critical to begin with a budget. Running out of money is a common reason why new businesses fail. A realistic budget can be the difference between having a successful business and joining the 50 percent of small businesses that fail in the first year. Remember that you will need to pay for equipment, marketing, and other expenses. Unanticipated costs occur from time-to-time so overestimate your expenses.
Set attainable financial goals. And re-evaluate them monthly, weekly, even daily in some cases. Achieving small goals can give you the motivation to keep going when times are challenging.
Diversify your investments and plan for emergencies
When you do begin to turn a profit, do not invest everything back in your company. While it is tempting to want to shore up your business and help it grow, you should never put all of your money in one place. If something does happen to your company, you will need some money to help pay your bills until you can get back on your feet. Look to invest in other businesses or other investments. Talk to your financial advisor to see which investment opportunities are best for your situation.
While investing in other places, put some cash aside in an emergency fund. Your goal should be to have an emergency fund worth three to six months of necessary expenses. An emergency fund will make the months where business is slow more sustainable and help pay for any big personal emergencies such as an illness or an unexpected home repair.
Ensure you save for your future
As an entrepreneur with a new business, it is easy to think about the immediate needs of your start-up business, but do not lose sight of your future and retirement. Ensure you set up a retirement account. As a small business owner, you have several options.
Traditional and Roth IRAs are accounts with tax benefits. In 2019, you are allowed to contribute $6,000 a year, or $7,000 if you are 50 years old or over. With a traditional IRA, the contributions are tax-deductible, and you are not required to pay taxes until you withdraw the money. For a Roth IRA, you pay taxes on the contributions upfront, but your withdrawals are tax-free.
There are other retirement plan options available to you as a small business owner as well including, a SEP-IRA, SIMPLE IRA, Solo IRA, and SIMPLE 401(k). Talk to your financial advisor to see which option is best for you.
As we celebrate National Entrepreneur Month, I want to congratulate all small business owners who have taken the risk to live out their dreams. Entrepreneurs are indeed good for the economy and our country.
Claudia Mollerup-Madsen is Vice President and Financial Advisor with the Wealth Management Division of Morgan Stanley in Houston.