If you are thinking of starting a small business but you don't know many entrepreneurs yourself, you may be surprised to learn that this is not necessarily a path to building wealth. The profit margins for small businesses can be small, and there are several risks involved in becoming your own boss and running your own enterprise. These risks are one of the reasons that some end up deeply in debt and back at the daily grind working for someone else. However, there are steps you can take that will help you build a secure financial base with your business and, eventually, wealth.
Slow and Steady
It is possible to start a company that exceeds all expectations and starts making big profits early on. No, it isn't common, and it isn't likely that this will be your situation. Furthermore, even if it is, that's still no guarantee of long-term success. Depending on the industry you're in and the product or service that you offer, this kind of stratospheric success can be more of a flash in the pan than something you can build a long-term strategy around.
As difficult as it can be, the best plan is to embrace a slow and steady process of accumulating wealth. To start with, you might be doing well just to break even or to be able to pay yourself a small salary. Look to small gains at first. Plan along a timeline of a decade rather than a year. If financial matters aren't your strong suit, don't hesitate to sit down with a professional and talk about your goals and how to reach them.
Shore Up the Basics
Once you're starting to turn a regular profit, there are still some basic things you need to take care of to ensure security. There are formulas that you can use to determine how much of your profit you need to reinvest in the business. A common suggestion is using around 30% toward salary and around 40% as reinvestment in the business. The remaining amount should be put toward savings.
These savings should include a cash reserve, which is a sum that helps keep money flowing even if you are waiting on unpaid invoices or have an unexpected expense, such as needing to replace a piece of equipment. This cash reserve will be a critical element in wealth building because it means you won't need to disrupt your day-to-day finances every time there is an issue. Those percentages are only ballpark figures, so look at what is normal within your industry to get a better idea of how you should distribute the money you're bringing in. If there are support organizations for small businesses in your community, they may be able to help you determine how to approach this.
Smart investing is a key to wealth building. One element of this is creating a retirement plan for you and any employees you have. However, you may also want to look to other types of investing as well, including getting involved in other types of business ventures. Real estate can be an excellent way to expand your earning opportunities. At its core, investing is all about putting money into something and getting more back, so you want to look for investments that have a high probability of being profitable.
There are also risky investments you can make that balance a high probability of loss with a small probability of a big payout, but this is something to consider later when you are comfortably well-off and have money that you can afford to lose. Real estate can be an excellent investment vehicle for small business owners, and the internal rate of return can help you assess the likelihood of profitability. You can review a guide that will help you determine how valuable the IRR might be for you and how it works to help you determine what investment choices to make.
Succession and Estate Planning
A big mistake many small business owners make is not thinking ahead about what might happen to their company if they are no longer there to helm it. This can feel like something that is so far in the future it isn't worth considering, or an entrepreneur might simply not want to think about it. However, a succession plan protects you, your employees, and your family in the same way an estate plan does against unexpected occurrences as well as over the long term.
In succession planning for your business, you would need to consider such things as which key employees could eventually take over and put mechanisms in place, including adequate training, that would allow this to happen. If you prefer, your company can continue to generate wealth for your family even if none of them are involved in its daily operations. You might want to consult an attorney for more extensive assistance on succession and estate planning.