Before the pandemic hit this spring, women were launching more than 1,200 new businesses every day — roughly twice the rate of men. In fact, in 2019, 21% of employer businesses had majority female ownership, according to a report by the Small Business Administration (SBA).
What a difference a year makes.
Women-owned businesses have been disproportionately impacted by the pandemic. One study by the National Bureau of Economic Research found that the number of female business owners dropped from 5.4 million to 4.0 million in just two short months, a 25% decline.
The loss of one fourth of female business owners is unprecedented and, as the study points out, may have longer-term ramifications for job losses and economic inequality.
Even female-owned enterprises that are surviving during these unprecedented times are struggling with lower sales, market uncertainty and fears of what the winter will bring, not to mention the demands on the home front with online learning and other shifts in caregiving. Business owners have had to make tough decisions about hours, operations and staffing — decisions that weigh on them heavily and cause many a sleepless night.
As someone who cares deeply about women and their financial well being, I am growing increasingly concerned that these dedicated female entrepreneurs will feel the pressure to make decisions that are in the best interest of their company, but in opposition to their own long-term financial well being.
That’s why I’d like to share some tips and perspective.
Before I dive in, I first want to point out that I am the daughter of a female entrepreneur. My mother owned and operated a successful restaurant for over 40 years. She started it when she was 19, when, believe it or not, banking regulations still required a male cosigner on a first loan. She successfully sold the restaurant to a Hardee’s franchise when she thought she could retire.
It was an interesting way to grow up. Some years were really good, and some were really bad — and it was easy to tell which was which based on family dynamics. But that firsthand experience taught me a great deal about the importance of separating business finances from personal finances — no matter how difficult doing so can be.
Here are some tips, based on lessons I learned from my mom and some I’ve learned over the course of my wealth planning career, for sharpening the lines between your business’s financial interests and your own.
Successful, sustainable businesses will have adequate profits to meet four key objectives.
First, a sustainable business affords the owner a salary that can support his or her lifestyle. Of course, there’s plenty of variability when it comes to lifestyle, but it should cover basic living costs with some left over for discretionary expenses. And just as your employees need a salary in tough times, business owners do, too.
Crucially, this compensation must also allow the owner to set aside money for retirement. As a general rule, I recommend investing no less than 10% of your salary for retirement over the course of your career. While it may be tempting to cut this contribution during lean times, consider this: the money you invest in the market when the market is down will grow exponentially when the market improves.
Third, profits must cover an emergency fund and/or you have to have a credit line that is capable of sustaining the business for several months in the case of an unforeseen event like a fire, natural disaster, or a global pandemic. It’s important to keep this fund separate and for the business only — and just as important for the owner to have his or her own personal emergency fund.
And fourth, there must be sufficient cash on hand to fund the growth of the business. From marketing to staffing, growing a company requires ongoing investment. As they say, you have to spend money to make money. It can be tempting for an entrepreneur to occasionally dip into personal funds to finance these items, but strong businesses will account for these in their budget.
An unexpected crisis
As we learned this year, the world can change dramatically in a very short period of time and even the best prepared of us can be hit hard when an unexpected crisis occurs. The importance of an emergency fund and having the right plan in place to weather an unexpected crisis are crucial elements of enduring challenging events such as a global pandemic.
Fortunately, the widespread economic chaos caused by COVID-19 spurred government intervention to assist business owners with small business guidance and loans and a loan forgiveness program. These resources along with amazing creativity in adapting business models to be COVID-resilient have helped many small businesses survive.
Many small-business owners were able to turn to their banks to assist them with loan applications and to their financial advisers to assess the health of their businesses so they could come up with a plan to navigate the pandemic.
During a crisis, it’s important to work with an adviser who not only understands your business and personal objectives but can also provide you with a tailored plan to adjust your financial goals to keep your business healthy and thriving even during downturns.
To debt or not to debt
Many businesses are initially and continually funded with personal savings, as well as investments from family and friends. And entrepreneurs who run into funding trouble often choose to drain personal savings and retirement accounts than seek out a small business loan.
As I’ve observed, female entrepreneurs are especially conservative when it comes to using credit to launch their business or to bridge funding gaps in tough times.
But it’s OK to take on appropriate levels of debt to ensure the business is properly capitalized. Remember, this is the business’s debt, not yours. And keep in mind, some of this debt may be written off come tax time. There is some tax relief this year when it comes to business losses that could prove to be advantageous not only this year, but also extend to the last three years.
Looking back, I realize that using credit to help in those bad times was a real challenge for my mother, but a necessity to her success, along with incredible resilience and good old American ingenuity.
Success after you
As the matriarch or patriarch of an organization, it’s important to make sure a business has a value independent of you — and that you recognize your value outside of it.
Remember, while a business may represent your largest investment in every sense of the word, business is business and personal is personal. If you cannibalize your personal value to benefit your business, your business will likely suffer down the line regardless.
Keeping a level of separation between the business and personal aspects of your life is difficult, but it’s crucial to the long-term health of the organization and your ability to make decisions about your business.
Angie O’Leary is head of Wealth Planning, RBC Wealth Management – U.S.
RBC Wealth Management is a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.