The old adage says that money can’t buy happiness, but it can lead to financial freedom. Research shows that money also provides calm and control. For a business owner, financial freedom grants you opportunities to scale, adding to your employee roster or tech stack. Likewise, a financially free operation isn’t dismantled by every large or unexpected expense. Because, as every business owner knows, those expenses will come.
What is financial freedom?
“Think of money as a resource that can free you from so many worries. Financial freedom is the calm that comes from being financially secure. It helps you sleep well at night. You’re not concerned about being derailed or indebted by the unexpected challenges that undoubtedly arise for an entrepreneur” said Raj Tulshan, founder of Loan Mantra.
A recent study from Harvard Business School correlates financial freedom with greater life satisfaction. Other benefits include improved mental health, more opportunities, and greater independence. These are significant objectives for any small business owner hoping to grow and thrive their companies.
Unfortunately, less than half (45%) of Americans can cover an $1,000 emergency expense without a credit card. Similarly, three-quarters of U.S. small business owners have retirement savings below $100,000.
So, how do you put yourself and your business on the path toward financial freedom?
Which Bank Account? Personal finances versus business development
First, it’s useful to understand the difference between financial freedom for you versus freedom for your business. Personal financial freedom means that you earn more than you spend. As an individual or household, you have created an emergency fund, made investments, and created a healthy retirement plan. An accountant or money manager can help you determine the best way for your household to acquire financial stability.
Financial freedom as a business owner means you know every dollar spent or accrued by your business. Not only are you tracking your business’s spending, but you are matching your books to your balance sheet. These financial records help you decide whether to budget more or less in certain categories. As a financially free business, you are amassing sufficient cash flow to cover ongoing costs, including payroll, as well as saving for strategic growth and improvement plans. Likewise, you are managing your operational expenses without being too leveraged on credit. Business owners with lines of credit, SBA, or traditional loans should ideally be comfortable paying their monthly payment. If this is a challenge, you should seek additional expertise from your financial partners, banker or accountant to discuss options and debt payoff plans.
At the end of the day, the “financially free” business owner is on track to meet their short-term and long-term business goals. More importantly, a business owner who has achieved financial freedom in their workplace will likely enjoy that same freedom at home.
Financial freedom for your small business
Here are some ways you can put your business on the path toward financial freedom:
Create a budget
The first step in reaching financial freedom is to set up and stick to a budget. Once you’ve compiled a list of your monthly expenses, determine whether they are fixed or variable costs. Fixed expenses are bills you can’t avoid, like payroll, rent, and equipment costs. Variable expenses are flexible and will largely depend on industry, geography or sector. For instance, if you are a retail store that in a high-traffic tourist area, you may spend additional money in October or November to decorate your shop for the holidays.
Ask questions
In addition to tracking budget, there are common questions each business owner should regularly ask themselves to manage their financial health. These include: Do your clients pay on time? Have you spoken with your top clients in the past 90 days? Do you have any outstanding accounts? And, if so, do you know why? Finally, is your financial documentation up-to-date and prepared in case you need to apply for financing? Loan Mantra's financial health checklist is a great tool to monitor ongoing questions that will not only help you track your budget, but your continued success.
Plan for unexpected expenses
For your personal finances, an emergency plan means having enough money in savings to cover at least six months’ worth of living expenses. That means you can cover your mortgage or rent, utilities, childcare, food, and other basic expenses for half the year in the event of an emergency. This same principle is even more important for a business, especially if you have employees or vendors relying on a consistent paycheck or income.
Business owners and entrepreneurs should have an emergency plan, with enough savings to cover daily and unexpected business expenses. Without adequate funding your business expenses, or for the inevitable emergencies (e.g. broken equipment, extra holiday orders, etc.), owners can get stuck in a cycle of borrowing to repair the past rather than preparing for the future. Ideally, a business owner will use their capital to innovate for what is ahead of them. If you don’t have emergency funds for your business now, start with your plan for how you will create that financial reserve.
Be an entrepreneur
Many people prefer to go the entrepreneur route instead of working for someone else because they have more control over their future...and finances. A Baylor University professor found that despite the challenges – including long hours and high stress– entrepreneurs report consistently higher rates of happiness vs. their wage-earning counterparts.
But the most successful entrepreneurs are equal parts of vision and organization. You can’t get to where you want to go without preparing and maintaining excellent books. This includes understanding your competing financial priorities. In discussion with your financial partner or accountant, it’s wise to measure your personal financial health with your business’s financial health and account for your stable salary, auto-deductions for retirement, and a wise succession plan.
Deal with debt
Carrying high interest loans is the opposite of financial freedom. Likewise, if you find you can only afford to make the minimum payment on your loans each month, major debt may accumulate over time. Consider consolidating your debt into one simple monthly payment and meet with a loan professional that can review business finances and make recommendations. Loan professionals can help determine lower rate options, government programs for which your business may qualify, or an optimal loan product to achieve your long-term goals.
Save with strategy
Experts recommend saving 10% of business income to build up your savings until you have at least six to eight months’ worth of operating expenses to cover unexpected costs. Automatically transferring money into a savings account each month can help business owners save a significant amount over time. Your strategy for both saving and scaling is directly correlated to your endgame.
“I remind my clients to have a one-week, one-month, and one-year plan in mind. Their one-week plan helps owners to align with measurable goals and numbers, until, month-by-month, they have arrived into a long-term place of financial security they have always wanted to be” says Tulshan.
Invest
If possible, invest 10% of revenue back into your business each month and don’t forget to invest for your personal retirement. A good financial partner--or team of partners--will help you determine the optimal ways to invest for the future of your household and your business. And while there’s always some risk involved in investments – and typically some level of market fluctuations – putting available funds toward stocks, bonds, mutual funds, Roth IRAs, 401(k)s and other investment opportunities will grow your wealth and put you on a path to financial freedom. Talk to a financial expert about how to build an investment portfolio.
Consider your money goals
Before making business purchases, strategically determine how that purchase will impact performance, sales or revenue. Use research and work with your team to determine the priority and need for all major purchases. For instance, if a major renovation is needed to help customers feel more comfortable inside your restaurant, perhaps that’s a larger priority than a marketing campaign. But, if your marketing team tells you that online delivery does 200x of the dining room on an average weeknight, it may make sense to invest current dollars into the digital campaign you’ve created.
If you are a solopreneur, look to other business leaders to inform your wins and mistakes. Consider how business magnate, investor, and philanthropist Warren Buffett purchased a $31,500 home in 1958 and hasn’t moved out of it since, despite the fact that his net worth is currently $104 billion. He can obviously afford a bigger, more expensive house, but he’s famously frugal. Conversely, controversial rapper and designer Kanye West is known for his extravagant lifestyle. He lives in a $20 million mansion – and rented Madison Square Garden to debut his clothing line – despite being $53 million in debt. In a bizarre move, he asked Facebook founder Mark Zuckerberg for $1 billion on Twitter. This is clearly an extreme example, but it shows how financially responsible Buffet amassed a tremendous fortune and has achieved financial freedom, whereas financially irresponsible West spent money he didn’t have and begged a tech guru for a financial handout on social media. Vetting your expenses wisely and consistently while learning from industry leaders is always useful.
Focus on what you can control
Over the past few years, we’ve seen headlines about banks collapsing, an impending recession, plummeting stocks and other doomsday stories about a financial system crisis. It is easy to panic and react to every challenge.
What’s most important is to understand that the market behavior is existing within a normal economic cycle. “History has a way of repeating itself, and the best entrepreneurs are the ones who use history to learn from it,” says Tulshan. He goes on to remark, “unfortunately, there will always be recessions, wars, and fluctuating interest rates. Take a deep breath.” Tulshan reminds business owners that Unemployment is down. Banks are protected. While the stock market and pricing will fluctuate over time, so much exists beyond the business owner’s control. The trick, then, is focusing on what you can control: creating a budget, and streamlining costs.
Work with a financial professional
No matter what stage you’re at within your financial journey, it’s wise to get advice from a financial professional. Find a financial expert you like and trust. Interview experts, check their references, collect referrals from friends and family. When you select a financial professional, you should have complete confidence in their knowledge, experience, and capabilities. Talk to them about your personal and business financial status and goals, and create a financial plan to help you achieve financial freedom and long-term financial health.
“Becoming financially free is a desirable – and achievable – goal,” Tulshan explained. “It takes dedication, determination, and consistency, but any business owner can find their way to financial independence.”
About Loan Mantra
Loan Mantra is a one-stop FinTech platform that democratizes the loan process by providing corporate sized services and access to new entrepreneurs, small and medium sized businesses. Small business owners identify two obstacles to their success: access to capital and financial education. At Loan Mantra, we remove these hurdles. We believe borrowers of all sizes should have equitable access to the $5.4 trillion marketplace of SMB financial products, lenders, government programs, and services. How?
Our end-to-end portal, BLUE (“borrower lender underwriting environment”) is built on decision-tree logic, so borrowers answer questions in the manner they understand best and find the right financial products and lenders. With a few simple clicks, our users complete loan origination paperwork; upload documents; connect or communicate with financial partners; and manage their loan process--anytime and anywhere. Our best-in-class FinTech meets NIST v. 500 standards so borrowers can safely store their financial records, making it painless to acquire more capital if they need it down the road.
As a minority-owned business, Loan Mantra understands the challenges facing underserved borrowers. Our mantra? To improve the future of human entrepreneurship through best-in-class technology, financial literacy, and commitment to equitable market access. Reach out today at www.loanmantra.com.