Financial planning for small business owners and family businesses

Small business owners’ financial planning is a little different than others’ financial planning. Some of the basic principles, of course, remain the same, but small business owners have more interest in keeping them in mind. What will happen when you retire, for example? Will you dissolve the project, sell it, or pass it on to your children? What are the tax implications of these measures? A solid financial plan addresses these issues and more.

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If you decide to open a business, it is a good idea to talk to a financial advisor before hanging the shingles. You’ll need capital to get things going, and a financial advisor can help you figure out where to get it. A counselor can help you think about how best to spend the money you have now and where you should go to look for more. Small business loans, venture capitalists, angel investors, incubators, and grants may be available, and each has its own pros and cons that can impact your business for many years.

You and your advisor can also create a plan to keep business and personal assets as separate as possible. This may not be as easy as it sounds, especially if you are a Sole Proprietorship or some other passing entity. It is much easier to devise a sound strategy to keep your business financing separate before you start than to go through the records and separate them later.

Get your right salary

Paying yourself is one of the hardest parts of entrepreneurship. Some small business owners make the mistake of paying themselves too little. It’s impressive and smart to put as much money back into the business as possible, but you have to eat and pay the bills. If your financial plan for your business doesn’t allow you to do that, there’s not much point in running a business at all. Your business needs to become a money maker rather than a money pit.

Other entrepreneurs err in the other direction. You set up a business to make money, so shouldn’t you get a good chunk of your business income? However, pulling too much pot increases the risk of your business experiencing cash flow problems and eventually failing. A financial advisor can look at the numbers and help you decide what salary you and your business can live with. It is also a good idea to run this number by your accountant.

Investing and Retirement Planning

As a small business owner, you are likely to invest a lot in your own business. This is a good thing to do when building your business, but you should never put all your investment eggs in one basket – even if they are your own. A financial advisor will help you decide how much to invest in your business and how much to invest elsewhere. It is a good idea to invest in some other companies and build a diversified portfolio.

You will also need to create a retirement plan that uses those investments. You may not have an employer to match your contributions to a retirement account, but you still need one. Small business owners have many tax-advantaged retirement avenues to choose from, and it’s important to make good use of them. Some business owners make the mistake of assuming that the final sale of the company will fund their retirement, but this is a very risky strategy.

cash flow control

Strong cash flow is never an accident. Companies that have a poor understanding of how and when they get the cash are destined to struggle, if not fail. Successful business owners carefully monitor their cash flow and are very meticulous about spending what they have. It is critical that you understand your long- and short-term goals and make sound decisions when prioritizing spending. Cash flow monitoring also allows you to see when things are going well so you can set aside some money for a rainy day when they aren’t.

tax planning

You’ll want your financial advisor and accountant to work together on this. Although their fields are fairly 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 taxes without affecting your cash flow.

You may, for example, be able to recognize when you have the money available to buy new equipment for your business and you can do so when the purchase spending will make the most of your taxes. However, you’ll want to tread carefully here. One way to cut taxes is to cut your earnings, at least on paper. With that said, make your income seem too low, and you may have trouble getting a business loan or credit.

Estate planning and exit

Once you start your own business, you have to decide how to end it. Sometimes the financial decisions you make along the way are shaped by your future plans. Passing the business to your heirs requires a different kind of planning than selling the business for retirement. 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. It will help you get the most out of the work you do at work over the years.

Choosing a financial advisor

When choosing a financial advisor, always choose 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 on a particular investment option. Ask for references and, if possible, try to find a consultant with plenty of small business experience.

Check the fee structure as well. Some financial advisors charge a flat rate while others work on commission. Both are acceptable, but a flat fee may make your budget more accurate in the early years of your business when money is a little tight.

Don’t fall into the trap of thinking your business is too small to hire a financial advisor. Financial planning for small business owners is just as important as large businesses. Perhaps more than that, as small businesses have less room in their budgets for financial error.

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