15 Money Principles for the Newly Self-Employed

Woman working in home office

Keep your business and personal finances separate, and try not to borrow from friends and family if possible. Photo: SBA

Being an entrepreneur is scary at times. Income fluctuates, there are no guarantees, and only about half of all small businesses even make it to the five-year mark. But that shouldn’t stop you from pursuing this path if it’s what you feel called to do.

While there’s no way to guarantee that your business will flourish into the success you initially envisioned, here are some money principles you can follow to stay in the race and keep your business and personal finances in check.

1. Limit How Much You Borrow From Family and Friends

You may have every intention to repay any funds borrowed to get your business off the ground, but life happens and things don’t always go as planned.

If you’re fortunate enough to secure a business loan from your financial institution, chances are you’ll do whatever it takes to remit payments in a timely manner to avoid damaging your credit score and to remain in good standing in case you need to borrow again in the future. But if the loan is from a friend or family member? Often, other financial priorities may take the front seat, which burns a major bridge in your relationship.

From what I’ve experienced, individuals would rather stiff the lender that poses the least amount of risk. But this isn’t necessarily the most logical choice as personal lenders have limited qualification criteria. They usually dole out cash on the strength of your relationship with them. A better option: Only use friends and family as a last resort.

2. Reserve Shopping Sprees for the Future

The dough is finally rolling in and you feel entitled to a little relaxation to pat yourself on the back. With the unwinding comes a mini-vacation, a visit to the spa, or a shopping spree at your favorite retailer. Treating yourself after a long and grueling week or month of work isn’t necessarily a bad idea, but should be done within reason.

Unfortunately, I fell victim to this trap a few years back. A handsome amount of money was rolling in, clients were happy, and the future looked nothing short of bright. So, I decided to enjoy the fruits of my labor without reminding myself that entrepreneurship has its highs and lows. Long story short, projects slowly stopped coming in and I was forced to step back, reassess the situation, and get my spending under control in a matter of days.

3. Avoid Blending Business and Personal Assets

Unless you want to keep sloppy books and run the risk of an audit nightmare, avoid mixing your business and personal finances.

If you’re having a difficult time accomplishing this objective, contact your financial institution and inquire about the business banking options you qualify for. Once you’re set up, make an initial cash deposit to get things up and running. From that point onward, the only items that should touch that account are business-related income and expenses.

This will foster organization, make your business more credible, and hedge against of the risk of personal liability should something unfortunate happen down the road. I also encourage you to pay yourself a salary — just don’t get into the habit of taking cash advances from your business or things could go bad rather quickly.

4. Don’t Forget to Save

I’m sure you’ve been told time and time again how important it is to save for a rainy day. And as tempting as it is to spend your hard-earned funds on something you’ve been eyeing for months, stick to your guns and continue building your safety cushion instead.

This was another one of those lessons I learned the hard way. Over the course of my corporate career, I’d grown accustomed to my paycheck arriving in my account every other Friday, allocating a certain percentage to my savings account, paying the bills, and going about my business. Deposits were always on time and I never had an issue with satisfying monthly obligations in a timely manner.

But that all changed when I took the leap into entrepreneurship. While some clients consistently paid on time, others disappeared like a thief in the night for several weeks or until they decided I should get paid. And because I had gotten away from consistent saving habits, I was left scrambling on more than one occasion.

5. Uncle Sam Is Always Watching

Isn’t it grand to finally rake in exactly how much you’re actually owed without Uncle Sam getting his piece of the pie? Sounds great, but we both know that’s not how it works.

The IRS still expects you to pay federal income taxes, but it’s now your responsibility to set aside a portion of your earnings each month to cover your yearly tax bill; the payroll department will no longer do it for you.

It’s critical you put money aside for this purpose: Fail to heed my warning and you could end up with an exorbitant bill you can’t handle. Also, check with your state’s Department of Revenue to inquire about any additional tax obligations you may be responsible for.

6. Exercise Buyer Power

When you initially register your business, all sorts of offers for materials and services will start rolling in. And it’s up to you to keep your excitement and wallet in check to ensure you don’t go overboard with the spending.

This means eliminating the wants from your list in favor of needs, and negotiating the purchase price of your final selections. In other words, never go with the first offer placed on the table.

The same rule applies for banking products from your financial institution. When I opened my business accounts, I noticed that I was being charged monthly administrative fees. Instead of settling or taking my funds elsewhere, I made a quick call to the customer relations department, explained my loyalty to their institution over the past several years, and they reversed the fees.

7. Hire With Caution

Think small when opening your doors for the first time. And no, I’m not referring to your visions, goals, or financial projections for the company — I’m talking about the staff on hand.

In an ideal situation, you’d spend 100% of your time focused on your company’s core competencies to grow revenue, hiring assistants to take care of smaller tasks. But let’s face it: No one will ever be as vigilant about your business as you are. And that shouldn’t surprise you — if someone is more passionate about your own company than you are, maybe this isn’t the path for you.

Start by operating as a jack-of-all-trades until you can comfortably afford to bring others on board. You may need a little fine tuning to learn certain skills, but you’ll save the business a ton of money.

However, if there’s an area of operations you just aren’t quite grasping, such as bookkeeping, it may be in your best interest to bite the bullet and pay for assistance to avoid making a costly mistake.

8. Invest Wisely

Perhaps you were quite successful out the gate and have a few pennies to rub together? Others in your immediate network may quickly take notice and suggest that you provide them with a capital infusion to get things up and running on their end. Proceed with caution for several reasons:

  • Newbie factor: Are you experienced and liquid enough to invest in others?
  • Risk of loss: Can you afford to take a loss this early in the game?
  • Deception: Is it the capital investment they’re after, or are they planning to infiltrate your network and threaten the future success of your business?

9. Don’t Go Overboard With Inventory

If you’re selling services, there’s no need to order massive amounts of inventory if the demand simply doesn’t exist.

Now, I’m well aware that the per-unit price is usually much lower when you order in bulk, which in turn boosts profit margins. But idle inventory is a major liability, especially when you need to cover other startup expenses and all your money is tied up in merchandise.

I’ve seen several companies order a large quantity of goods out of the gate in an effort to save money, only to end up applying deep discounts to move product and generate cash flow. And in some instances, these entities actually took a loss.

My advice: Smart small, even if it costs your more, and leave some cash on the table should other needs arise. And don’t forget to consider other expenses you may incur, such as storage space to house products or additional research and development should the initial product be defective.

10. Plan Ahead

Is your new business the result of a vision that appeared out of thin air one day and you couldn’t wait to get started? If so, you probably didn’t do much planning before introducing your brand to the general public. And while it is rather dangerous to wing it, or fake it until you make it, it’s not too late to sit down and formulate a plan from this day forward. A few items to include:

  • Goals: Short-term (1 year), mid-range (2-5 years), and long-term (5+ years)
  • Financial projections: Could be monthly, quarterly, and annually
  • Core business activities: What are your primary revenue-generating functions?
  • Competitive advantage: Your unique selling proposition, and how you will generate buzz and boost conversion rates

11. Income Smoothing

Having a financial cushion to fall back on is paramount should an emergency arise or a payment come trickling in much later than expected. Another option to consider is income smoothing.

As a new entrepreneur, your income may experience steep fluctuations each month, which makes it extremely difficult to stay afloat and make timely payments. Until you get a few retainer clients under your belt and can comfortably afford to live well below your means, you may want to consider having a separate savings account or line of credit intact to get you through those rough patches.

However, this will only work if you commit to replenishing your account or paying the outstanding balance as soon as the funds arrive. Otherwise, you will more than likely end up financially strapped and in a mountain of debt.

12. Skip the Fancy Corner Office

For several years, I’ve had a burning desire to occupy a corner office in my very own suite. But there’s only thing holding me back: the unnecessary overhead.

Affordability isn’t an issue; office spaces in my area of residence are on the cheaper end of the spectrum. I just don’t see the point in incurring expenses that aren’t essential to primary business functions.

In fact, I will more than likely continue to work from the comforts of my own home until I can no longer effectively manage operations via telephone and my laptop. Doing so saves me a ton of cash otherwise spent on gas, wear and tear from the daily commute, dining out for lunch, monthly rent for office space, utilities — the list goes on.

13. Expand Your Horizons

When you compiled your list of goals, did you include alternative ways to boost revenues and allow some flexibility to jump on other opportunities that could arise? You definitely don’t want to put all your eggs in one basket, because things don’t always go as planned and the demands of your target market can change.

I started out as a financial mentor, which was a lucrative side-hustle when the economy was tanking and consumers were desperately looking for ways to scale back. But as the economy gradually started to improve, the demand for one-on-one services decreased. However, I had my writing, consulting, and speaking services to fall back on, so my business weathered that decline.

14. Protect Yourself

In your previous career, there’s a good chance you had disability, health, and life insurance, and a retirement plan in place. Transitioning to the world of entrepreneurship is not a pass to let these coverages fall to the wayside. Now’s not the time to put it all on the line for your business, but remember to protect your most valuable asset: you!

15. Your Personal Finances Matter, Too!

We’ve spent a bulk of our time addressing your business finances, but what’s taking place on the personal side also matters. Here are a few nuggets of wisdom to keep in mind:

  • A raise isn’t an excuse to overindulge; bank the extra money for a rainy day.
  • Reduce expenses and outstanding obligations as much as possible so you can comfortably survive if things go sour for a brief period.
  • Make timely payments to preserve your credit score; you may need it for a small business loan in the near future.
  • Work with creditors and service providers to modify due dates that conflict with your pay schedule.

As you exercise sound financial habits and hone in on your strengths, you will be well on your way to building an empire.