Financial Planning Tips for Small Business Owners

Small and mid-size business are the core the of the U.S. economy. Entrepreneurship and creativity have been moving the American economy for centuries. In fact, the U.S. has one of the best grooming environments for startups and small businesses.

Business owners spend several years building up their business. They invest a significant amount of personal time and capital to grow their companies. Many of these entrepreneurs will have their family fortune locked in their business. Focused on their business, often the founders of small firms ignore or delay their personal financial planning until they come close to retirement. So here are several practical steps that business owners can follow to establish a successful financial plan.

Balance Business Goals and Personal Goals

The first and most important step in the personal financial planning process is setting your short and long-term financial goals. In many cases, business goals can interfere and clash with personal financial goals. Business goals to expand into a new market or purchase a new factory can negatively interfere with your personal goals such as saving for retirement or college education for your children. Striking the right balance between your business and personal goals is a key to achieving them. Prioritizing one over the other may hurt your own long-term financial success. (For more, see: 5 Biggest Challenges Facing Your Small Business.)

Explore Different Financing Alternatives

Every new business idea requires capital to start. The success of the venture depends on the owner’s ability to secure financing. Sometimes, the funding comes from personal savings or the sale of property. Other times, the owner needs to look for external funding within his or her social circle or even approach a financial institution. The external financing can be in the form of a loan or equity stake.

Another great way to finance your idea is your customers. In fact, your clients are one of the best and most inexpensive sources of financing. If your customers love your product, they will be willing to give you an advance payment, subscribe to your platform or consider a product/service exchange. (For more, see: The 4 Most Common Reasons a Small Business Fails.)

Control Costs

Even the best idea can fail if it doesn’t generate a profit. In simple numerical terms, company revenue should be higher than expenses. Many ventures do not succeed because the company cannot generate enough revenue to cover all costs. Clearly, the first answer will be to generate more revenue. However, many successful companies are notorious with their focus on cost control. Business owners must stay on top of their expenses. They must track and analyze each cost. Owners should look for operational deficiencies and overlaps, result-based compensation, economies of scale and ways to increase productivity.

Manage Liquidity

Businesses need cash to maintain healthy growth. Not surprisingly, prominent investor Warren Buffet prefers to invest in companies generating significant cash flows. The capacity to produce cash from its operations will determine the company’s ability to pay its employees, creditors and vendors. Building a disciplined system of managing receivables and payables and maintaining a cash buffer for emergencies are key.

Manage Small Business Taxes

Filing and paying taxes is a long and painful process. The current U.S. tax law is very complex. Often, your tax bill depends on your company’s legal status. Sole proprietors have different taxation rules from C corporations, for example. Speak to an accountant or tax lawyer to find out what legal status works best for you. To avoid missed opportunities and last minute mistakes, you have to prepare for the filing process in advance. Start early. Keep a clear record of all your expenses. Track all tax filing dates. Remember to pay all federal and state taxes, Social Security, Medicare, local permits and fees. Consider using professional bookkeeping software and working with a CPA.

Establish a Retirement Plan

Having a company retirement plan is an excellent way to save money in the long run. Pension plan contributions could reduce current taxes and boost employees’ loyalty. There are few alternatives, such as a 401(k), SEP IRA and SIMPLE IRA. I am a big supporter of 401(k) plans. Although they are a little more expensive to establish and run, they provide the highest contribution allowance over all other options.

The maximum employee contribution to 401(k) plans for 2017 is $18,000. The employer can match up to $36,000 for a total of $54,000. Individuals over 50 can add a catch-up contribution of $6,000 for a total of $60,000 in annual contributions. (For more, see: Choosing a Retirement Plan for Your Small Business.)

Build a Safety Net

Creating a safety net is a critical step to protecting your wealth. Many business owners hold a substantial amount of their assets tied to their personal business. By doing so, they expose themselves to a concentrated risk in one company or industry. Any economic developments that can adversely impact that particular sector can also hurt their personal wealth. The best way to build a strong safety net is asset diversification.

Set Up An Estate Plan

Estate planning is the process of arranging the disposal of your assets after your passing. It can involve your family members, any business partners or other individuals and charitable organizations. Estate planning starts with setting up a family trust and personal will and can also affect financial, tax, medical and business planning. You can use estate planning to eliminate uncertainties over the administration of your assets in probate and to maximize the value of your estate by reducing taxes and other expenses. The ultimate goal of estate planning can be determined by your specific goals and may be as simple or complex as your needs dictate.

Plan for Business Succession

A successful business will have an impact on various parties such as owners, employees, contractors, vendors, clients, landlords and suppliers. Creating a business succession plan will ensure that all parties’ interests are met in the event you decide to discontinue your business or pass it to another person. Moreover, a robust plan will address numerous tax and financial issues which will result from the succession. The complexity of the succession plan will depend on the size, industry and legal status of your business. (For more, see: How to Create a Business Succession Plan.)

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