You left that high-profile corporate job for the opportunity to be your own boss. Now you're wondering how you're going to finance your business, plan for retirement, pay for your children's education and buy that new car you desperately need. Keeping your business separate from your personal life is sometimes difficult when you're a small-business owner. It's particularly tough when you're trying to keep your business and personal finances separate as well.
Personal finance guru Chris Farrell shows you how to keep your finances in order while running your own business in his book Right on the Money. He explains how to plan for retirement, deal with credit card debt and meet your financial goals. Here's his introduction to Personal Finance 101.
Entrepreneur.com: What are some basic tips small-business owners should keep in mind when putting together their personal finance plan?
Chris Farrell: Small-business owners get into trouble when they mix their business and personal finances. Not only will they run into tax problems, but it's also very difficult to know whether you're profitable or not and what you're taking out of the business. It's very easy for small businesses to slip into this mode, but it's probably one of the biggest mistakes a fledgling entrepreneur can make.
Everybody I've talked to [for my book] made the same points. One important one is that having a business plan is incredibly important. It really helps you focus your thoughts. If you have a business plan, take it to a banker or another professional. If they reject you, the question is, why did they did they reject you? What did they say? Then take your business plan back, revise it and think about it. One thing the business plan allows you is it not only lets you hone in on your thinking but you also have a document you can take to various professionals. You're trying to listen to what they're saying and figuring out what you can take away from the table and how to improve your business plan.
Money isn't always the most important thing, but you should spend time researching what your costs are going to be. Spend time going to trade shows, talk to people in the business [you're planning to go into] because most small-business people are willing to talk about their business.
Entrepreneur.com: What are some personal finance mistakes small-business owners often make? Is there a certain mistake that's made often?
Farrell: One is not funding an individual retirement account. I know it's hard to find money to do it, but the adage is the same whether you're a small-business owner or an employee. Even if you can only put a little bit aside into a tax-deferred account, it's worth it. You really can't put your retirement on hold.
The second thing I've found is that small-business owners often hesitate to open up a retirement plan for their employees. You're really hurting yourself because you need that plan for your retirement. In this highly competitive market, labor is in a better position because the economy is strong and labor shortage is there-it helps you compete for better workers. We live in an era where people may not know how to run their retirement savings plan but just about everyone knows they should have one. There are a lot of very cheap turnkey products being created that target small business. I just think that it's a good move to build [a retirement plan] into your plan upfront, whether you're a sole proprietor or you're starting a business where you're going to have employees.
Entrepreneur.com: If you're just starting out and looking for financing for your business but you have problems with your credit history, what are some things you can do to straighten that out and find financing?
Farrell: Two things. First, wait, because with time, your credit history does improve. The other thing depends on what kind of a credit history problem it is. There's nothing wrong with having worked with a business that went under or a business that failed. In fact, a lot of times it improves your hiring prospects because people figure you've been in the trenches and you know what it's like.
It depends on why your credit history is bad. Is it because you took a reasonable gamble and it failed, so you fell back on your mortgage payments a bit and you took on a lot of credit card debt and chipped away at it and you got yourself in shape but there was a tough period of time? I think most people can understand that-they can deal with that. They want to see if you have an idea-a passion. Do you have a business plan? Do you have an exit strategy or a way to pay back the lender or the equity holder? It's not an insurmountable barrier, but if you do have a troubled credit history report, it's a warning sign. If it's the type of thing where you haven't been an entrepreneur, you'd have trouble getting a mortgage or getting a good car loan. What you have to do before you go out and start setting up that business is get that credit history cleaned up and show good payment strategies.
Entrepreneur.com: What is the most important piece of advice you'd give to a person regarding managing their personal finances?
Farrell: Personal finance is not rocket science, and it's not hard to do. You want to keep your personal finances as simple as possible. If you're buying life insurance, buy term life insurance to protect your family if you die. Save for your retirement, don't take on credit card debt-build this into your habits and your personal finances will evolve. If you're successful as a small-business person, you're eventually going to face a lot of fairly complicated personal finance issues dealing with state planning and how you want your assets distributed when you die. Until you reach that point, the goal is to keep it simple and flexible and keep your options open. In our society, you have to somehow save for your retirement because that's being expected of you more and more. That's one of those things that's hard to make up if you don't.