Founders have to set themselves up for personal finance success irrespective of their business’s performance.
A risk-averse entrepreneur is as much of an absurdity as a tightrope walker who’s afraid of heights. Economist Richard Cantillon is credited with having coined the word “entrepreneur,” which literally means “bearer of risk.” And that makes sense: In fact, entrepreneurs actually thrive on uncertainty. They have to be scrappy and resourceful to effectively grow and scale their businesses; and that outlook has a trickle-down effect.
While it’s extremely common for new startups to burn more money than they make, it’s important for founders to set themselves up for personal financial success irrespective of their business’s performance. The reason is clear: The faster you scale, the harder you can fall.
Personal finance consequences generally fall into two categories: how your decisions are directly affecting you and your family, and how they are affecting your business’s ability to thrive. Unfortunately, naive, inexperienced entrepreneurs aren’t the only ones who fall prey to crippling debt. Even veteran business owners with vast coffers are capable of making questionable financial decisions.
What can budding entrepreneurs learn from these polarizing examples of lavish spending and frugality?
Here are three tips to help you strike a balance in the pursuit of a livable income while avoiding crushing debt:
1. Beware of putting all your eggs in one basket. You’re all in, putting a lot of time, effort and money into your business; you know everything you’re giving it, so you always feel close to the next success milestone. Even if you’ve had some success, it can be hard to sustain that success quarter over quarter. Cutting losses before debt builds up to unsustainable levels is often the best move. A good rule of thumb is to have at least six months of runway, giving your business six months to see a return.
2. Pay yourself based on benchmarks. How much should entrepreneurs pay themselves? Set a benchmark, and pay yourself a predetermined level of compensation once you’ve reached a certain level of revenue. Of course, benchmarks work only if you can hold yourself accountable. If you depend on the company you’re building to pay all of your personal expenses, fluctuations in your private life may bleed over and affect the business when you have to pull money out of it.
Instead, develop a business plan with a 12- or 18-month runway. If you just keep pumping more of your own money into it thinking that things will improve, you’re going to dig yourself into a hole that could take years to climb out of, hindering your ability to pursue another venture in the future. If you don’t reach your targets, consider alternatives to dipping into personal savings, retirement funds or investments. Seek external validation from friends, family or venture capitalists.
3. Put yourself in your 65-year-old shoes. First and foremost, funds you’ve spent years saving should be set aside and considered sacrosanct. Your business needs to reasonably support your retirement savings. Pulling money from your personal savings to pay for business expenses can stress you out. Decisions such as this only make things worse. When you find yourself making a highly emotional financial decision, think about whether it will leave you in a good place when you’re ready to retire.
Don’t fall from that tightrope or panic when the pressure builds. For all financial decisions regarding both your company and your personal life don’t count on success. Set benchmarks to hold yourself accountable, and try to imagine yourself at 65. If there’s a chance you might regret having made that decision, think twice.