If you are like most small business owners, most of your time and energy goes into running the business, rather than worrying about where the business might be in 10, 20 or 30 years. However, there are some basic and important financial steps for businesses to consider regardless of their age, success or mode of business. As we know, people don't plan to fail, they fail to plan. Those owners who take the time to plan have much greater success building a small business, which in the end, might not be so small. Wisely managing both your business and personal finances entails the same basic steps:
1. Set achievable short- and long-term goals.
2. Benchmark current business measures.
3. Develop and implement a comprehensive plan.
4. Monitor the progress as your business situation changes.
One of the most important steps for new businesses is the management of cash flow. Without such management, organizations can dissolve quickly. Establishing and consistently using an accounting software program will direct the business in line with the overall goals and provide a benchmark for later comparisons. By entering accurate information, the balance sheet (statement of financial position) and cash flow projections will emerge, allowing those directing decisions to determine how and where efforts should be focused. This gives the owner and key decision makers information to know which parts of the business are performing well and which need improvement. Such a program will also allow your accountant to prepare tax returns with greater efficiency and accuracy, as well as make recommendations for anticipated growth and account for tax law changes.
Having a qualified accountant on your team is very important. Your accountant will understand how to prepare for pending tax law changes and changes that affect the legal structure of your business. With good planning, your accountant can identify areas to save on taxes, maximize the timing of income and expenses, and offer advice on charitable gifts and funding of employer sponsored retirement plans. Tax planning should be a year-round process, not a fire drill when tax deadlines approach.
Another important aspect of business financial planning that is often overlooked is risk management, or insurance. While it is tempting to forgo an expense for a benefit a business may never actually use, the risks of disaster are real. You may fund the risks yourself or transfer them to an insurance company. Businesses can and do fail as a result of deficient protection. Different types of organizations require consideration of various lines of insurance. Some examples include: liability insurance, property insurance, business interruption insurance, key person life and disability insurance, workers compensation insurance and health insurance. While health insurance premiums are a major expense, there are ways to manage costs while still benefiting the owners and employees. I recommend using a business consultant to decide which insurance is necessary and then select an insurance broker to fill those needs.
Setting up a retirement plan may not be the first thing to do when starting a business, but there are many benefits to planning early. Beginning retirement planning early allows for diversification, saving money for retirement, savings on taxes and providing employees a retirement work benefit. By diversification, we're talking about the avoidance of putting all your eggs in one basket. Some business owners believe the sale of their business decades later will provide the liquidity event to fund their entire retirement. No one can predict the future, and diversification, along with thoughtful planning are the best hedges against unknown risks. Having some of the business earnings go into an investment portfolio will give owners options for retirement dollars. There are different types of retirement plans to consider, but for small businesses Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) plans are easiest to set up and administer. SEP plans are solely funded by the employer while SIMPLE plans can be funded by both the employer and employee. Regardless of the type of plan, sheltering dollars for retirement planning is wise from multiple perspectives.
In line with retirement planning, succession planning should also be considered throughout the life of a business. The likelihood of realizing the true value through an eventual sale or transference to the next generation increases significantly with planning. Leaving discussions regarding succession planning to the final stages of the owner's involvement is a mistake. Succession planning should begin when the business is conceived. The result of early succession planning can benefit the full life of a business - the result of which comes from the owner's values being aligned with how the business is run. There are also unplanned succession events whereby the owner can't work in the business, due, for example to death or disability. Cases like this should be considered and scenarios discussed so the organization continues without disruption or surprise.
By no means are these elements of planning exhaustive or in depth; however they will expose important financial topics that should be considered when starting and operating a small business. For clarification, there are other elements to business plans that involve raising money for financing purposes and operating plans for daily management of the business, which have not been addressed here. Just as personal financial planning is unique to each individual or family, business financial planning is unique to each organization. I recommend locating a planner that can consider both personal and business financial plans in context of each other. This provides the advisor a more complete financial picture thereby tailoring their recommendations in line with all financial goals.
Justin Thomas is a partner and Certified Financial Planner with TCI Wealth Advisors in Reno. Contact him through www.tciwealth.com or 775-746-6255.
