Financial planning is critical for the success of any private business owner. It provides a roadmap for achieving short-term and long-term goals and ensures the business is financially healthy. However, small business owners often wear multiple hats and juggle numerous responsibilities, making it challenging to focus on financial planning. It is crucial not to be too busy to plan, as doing so can lead to missed opportunities and increased risks.
Here are a few essential financial planning strategies for small business owners.
1. Separate your personal financial goals from your business goals
Small business owners often invest a significant portion of their financial resources into their businesses. While this shows commitment and belief, it can blur the lines between personal and business finances. It’s essential to separate these to ensure that personal financial security isn’t entirely tied up in the success of the business.
To achieve this separation, create distinct financial plans for personal and business finances. Set specific goals for each and monitor them independently. For instance, you may want to save for a personal goal, such as a child’s education, while aiming to grow your business revenue by a certain percentage.
2. Consider alternative funding options to diversify your business-related risks
Many small business owners rely on a single source of funding, often their savings or a loan from a single lender. This scenario increases risk because if the business fails, it can take the owner’s personal finances down with it. Diversifying funding sources may help mitigate this risk.
Look into alternative funding options such as business grants, venture capital, crowdfunding, or angel investors. Each can offer capital and diverse business experience and networks. They can also cushion your business against economic downturns or unexpected financial challenges.
3. Remember to plan for retirement
For small business owners, the line between business and personal life is often so thin that they can overlook retirement planning. Unlike employees who may have employer-sponsored retirement plans, small business owners are responsible for setting up and contributing to their retirement plans, such as a SEP IRA, SIMPLE IRA, or a Solo 401(k).
These plans not only help in saving for retirement but also offer tax advantages. Work with a financial planner to determine the most suitable retirement plan and regularly contribute to it.
4. Prepare your exit strategy
Exit strategies are a critical component of financial planning for small business owners. Whether you plan to sell the business, pass it on to family members, or close it down, having an exit strategy can ensure you are financially prepared for the future.
Consider business valuation, the structure of a sale, and the tax implications of various exit strategies. Planning for these eventualities in advance can increase the chances of a favorable outcome when the time comes.
5. Schedule financial planning
Often, small business owners are so immersed in day-to-day operations that they neglect long-term financial planning. However, planning should be a continuous and integral part of managing a small business. Regularly set aside time to review and update financial goals, analyze business performance, and adjust strategies as necessary.
Creating a financial calendar can be helpful. Set dates for reviewing your financial plans, similar to how you would schedule regular business operations, to ensure financial planning remains a priority. If you work with Credent, we hold an annual meeting between you and your advisor to review your plan and goals.
Financial Planning for Business Owners
Financial planning should not be an afterthought for small business owners. It underpins the stability and growth of the business and the owner’s personal life.
By separating personal and business finances, exploring diverse funding options, considering retirement planning, preparing exit strategies, and dedicating time to planning, small business owners can build a more secure and prosperous future.
Remember, the time spent planning today can save a significant amount of time and stress in the future, paving the way for personal and business success.
To build confidence and hope in your business’s financial plan, reach out to our team using the form below.
Adapted from: “Financial Planning for Private Business Owners.” FMeX. 2023. https://abm.emaplan.com/ABM/MediaServe/MediaLink?token=30915cf10a3d41db951230a6fa5894b7