Ask 10 different business owners what financial freedom means to them, and you’re likely to get 10 different answers.
For some, it’s the peace of mind that they can meet payroll without worrying about how they’ll cover it. For others, it’s knowing they have the capital to expand into new territories or invest in new inventory.
Whatever financial freedom looks like for you and your business, it’s important to make a plan to achieve your goals and watch out for common pitfalls that can prevent you from reaching them.
How Business Financial Freedom Is Different from Personal Financial Freedom
Whether you are talking about business finances or personal finances, having financial freedom means you take ownership of your expenses, so you control them—they don’t control you. With dependable cash flow and little to no debt, financial freedom ensures you have enough savings, financial investments, and cash on hand for emergencies and growth.
As a small business owner, you know it’s smart to keep your business finances separate from your personal finances. But how does that translate to your financial freedom efforts?
Although at a high level the definition of financial freedom can be applied to both, when you drill down into your personal and business goals, it is easy to differentiate and maintain the separation.
Personal financial freedom goals:
- More earnings than expenses
- Emergency fund
- Retirement plan
Business financial freedom goals:
- Control of your business’s day-to-day finances
- Sufficient cash flow and savings to cover financial emergencies
- Little to no debt
- Ability to manage operational expenses without relying on credit
- On track to meet long-term business goals
Common Obstacles to Business Financial Freedom
Setting goals is the easy part. The hard work starts when you factor in the roadblocks you will need to overcome to reach those goals.
Of course, your specific challenges will be unique to your business, but there are a few universal obstacles almost every business owner must address if they want to achieve financial freedom.
Inconsistent cash flow
Liquidity is an issue for many small businesses. Failing to maintain a balance between cash coming in and bills to be paid makes it difficult to manage day-to-day expenses and prevents the company from growing.
No plan for a rainy day
Without an emergency plan and a rainy day fund, when (not if) the unexpected happens, your business may not weather the storm. This is a core component in achieving financial freedom for your business.
Shortage of funding
Without adequate funding in place for startup costs and ongoing expenses, such as rent, utilities, payroll, and business infrastructure, you will get stuck in a cycle of borrowing to buy what you need to operate and never get ahead.
Lack of a budget
Financial freedom is unattainable if you don’t set up and stick to a budget. Tracking spending and allocating specific amounts for all expenses, from marketing to web development to office supplies, ensure you don’t spend more money than you have.
Ad hoc business accounting processes
With all of today’s technology, there is no reason for a business to manually manage accounts receivable and accounts payable. Poor recordkeeping and inaccurate invoicing will have a negative impact on cash flow, client relationships, and employee productivity at a minimum.
Mixing business and personal finances
It’s tempting to “streamline” your finances and combine your business banking and accounting with your personal finances. However, mixing the two is risky and can lead to tax penalties, compliance issues, and cash flow problems that can hurt your business.
Tips for Business Owners Who Want to Start Their Journey Toward Financial Freedom
Now that you know some of the main obstacles to watch out for, you can start mapping your business’s journey toward financial freedom.
Know your starting point
The first step in financial freedom is making an honest assessment of where you are starting. Compile a list of all of your lines of credit, assets, cash, inventory, savings, payroll, overhead, and any other way money flows into or out of the business. Then add it all together. This is your starting point.
Define your goals
It’s not enough to say you are working toward financial freedom—you must define exactly what that means and how you intend to achieve it. Make specific, actionable, measurable goals for both the short and long term. Put them in writing and tell other people. Make yourself accountable to the rest of the company.
Financial freedom doesn’t happen overnight. Look at the big picture and set priorities that move your goals toward the finish line. For example, if one of your goals is for the company to have six months of operating expenses in savings, prioritize cutting unnecessary expenses and diverting that money to savings.
Create a budget
Creating—and sticking to—a budget is a time-tested strategy for obtaining financial freedom. This spending plan should include all of your business’s expenses and how much you have to spend on each. If you find that you are consistently overspending in one area, find out why and try to find an alternative.
As you work toward financial freedom, make “spend less, save more” your new mantra. This can seem easier said than done when you have a business to run. However, there are several ways to cut costs that provide almost immediate results, such as automating repetitive tasks to free up resources, outsourcing positions rather than hiring a full-time employee, and renting office space and furnishings instead of buying them.
Invest in the company
Yes, we just talked about spending less, but investing in your company is essential if you want to stay competitive. There is a huge difference between spending money on expensive office decor and expanding your business reach, building your team’s technology skills, and developing new products.
Plan for the future
As we learned the hard way in 2020, you don’t know what’s coming down the pike. Today, your financial freedom strategy has to include resiliency and contingency plans and a significant cash reserve to help maintain operations and meet your business goals even if the market takes an unexpected turn.
You’re on the Road to Financial Freedom
When you’re a business owner, managing your finances can sometimes get a little—OK, a lot—overwhelming. Between overhead, payroll, inventory, and the dozens of other places the money goes, sometimes it feels like cash flow has a one-way ticket out of your business account.
For many business owners, financial freedom seems out of reach. However, with a solid plan, knowledge of the risks, and the willingness to do the hard work, almost every business owner can enjoy the peace of mind you get when you control your finances instead of them controlling you.
There are a lot of unknowns when you start down the path to financial freedom, but one thing is certain: You can’t do it alone.
Partnering with a bank that understands the needs of businesses will help ensure you have the financing, banking tools, and support you need to guide your business to financial freedom.
Download your free copy of How to Choose the Right Bank for Your Small Business to learn how to find a financial partner that will help your business thrive.