Financial Planning for Small Business Owners


Mark Oswego

Nov 21, 2021


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Accounting & Finance

Financial planning for small business owners is different from financial planning for others. Some of the basic principles, of course, remain the same, but small business owners have extra consideration to take into account. What will happen when you retire, for instance? Will you dissolve the business, sell it, or pass it to your children? What tax implications do those actions have? A solid financial plan addresses these issues and more.

Getting Started

If you've decided to open a business, it's a good idea to talk to a financial advisor before you hang your shingle. You're going to need capital to get things rolling, and a financial advisor can help you figure out where to get it. An advisor can help you consider how best to spend the cash you have now and where you should go to look for more. Small business loans, venture capitalists, angel investors, incubators, and grants may all be available, each with pros and cons that can affect your business for many years.

You and your advisor can also develop a plan for keeping business assets and personal assets as separated as possible. This may not be as easy as it sounds, especially if you're a sole proprietorship or other pass-through entity. It's much easier to develop a sound strategy for keeping your business finance separate before you start rather than digging through records and separating them later.

Get Your Salary Right

Woman holding her paycheck

Paying yourself is one of the trickiest parts of entrepreneurship. Some small business owners make the mistake of paying themselves too little. It's admirable and intelligent to put as much money back into the business as you can, but you need to eat and pay bills. If your business financial plan doesn't allow you to do that, there's not much point in running the business at all. Your business needs to become a moneymaker rather than a money pit.

Other entrepreneurs err in the other direction. You started a company to make money, so shouldn't you get a sizable portion of the business income? However, pulling too much out of the pot increases the risk that your business will have cash flow problems and ultimately fail. A financial advisor can look at the numbers and help you decide on a salary that both you and your business can live with. Running that number by your accountant is also a good idea.

Investment and Retirement Planning

As a small business owner, you likely invest quite a lot in your own business. This is an excellent thing to do when building your business, but you should never put all of your investment eggs in one basket — even if it's yours. A financial advisor will help you decide how much to invest back into your business and how much to invest elsewhere. It's a good idea to invest in other companies and build a diversified portfolio.

You'll also want to develop a retirement plan that utilizes those investments. You may not have an employer to match your contributions to a retirement account, but you still need to have one. Small business owners have many tax-advantaged retirement vehicles to choose from, and it's essential to utilize them well. Some business owners make the mistake of assuming the eventual sale of the business will fund their retirement, but this is a precarious strategy.

Monitor Cash Flow

Someone giving cash to another person

Strong cash flow is never an accident. Businesses with a poor understanding of how and when they get cash are destined to struggle, if not fail. Successful business owners monitor their cash flow carefully and are pretty particular about spending what they have. You must understand your long- and short-term goals and make sound decisions when prioritizing spending. Monitoring your cash flow also allows you to recognize when things are going well so you can set some money aside for a rainy day when they're not.

Tax Planning

You'll want your financial advisor and your accountant to work together on this one. Although their fields are closely related, financial advisors lack an in-depth understanding of most tax laws, and accountants know very little about financial planning. Together, these two professionals can help you plan strategies that reduce your tax without impinging on your cash flow.

You may, for example, be able to recognize a time when you have the cash available to buy new equipment for your business and can do so when expending the purchase will do you the most good on your taxes. You want to tread carefully here, however. One way to lower your taxes is to reduce your profits, at least on paper. Make your income look too low, however, and you may have trouble securing a loan or business credit.

Estate and Exit Planning

Once you've started your business, you need to decide how to end it. Your plans sometimes shape the financial decisions you make along the way. Passing the company to your heirs requires a different type of planning than selling the business to retire. A financial planner will help you get what you want out of your business along the way and help you develop a sound exit strategy when it's time to go. She'll help you get the most out of the work you put into the business over the years.

Choosing a Financial Advisor

Couple working with a financial advisor

When choosing a financial advisor, always opt for a certified financial planner or CFP. Being one legally requires them to act in your best interest at all times, even if they make a little less money from a particular investment option. Ask for references and, when possible, try to find an advisor with a lot of small business experience.

Check out the fee structure, too. Some financial advisors charge a flat rate, while others work on commission. Both are acceptable, but a flat fee may let your budget more accurately in the early years of your business when money may be a little tight.

Don't fall into the trap of thinking that your business is too small to necessitate hiring a financial advisor. Financial planning for small business owners is just as crucial for large corporations. Perhaps even more so, as small businesses have less room in their budgets for a financial misstep.

Speaking of financial missteps, you must reach out to emarketing companies who can help you make sure you aren't wasting time and money on misguided advertising efforts. Instead, get help choosing the right social media platform for your business. Reach out for help today, even if your business is still in the planning stages. The right financial and marketing decisions can make the difference between watching your startup thrive or failing to get it off the ground.

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