Financial planning is essential for anyone who wants to achieve financial independence. The goal of financial planning is to help you reach your financial goals, whether that be retiring by a certain age or having the money to open a new business. For small business owners, financial planning is especially important because you need to ensure you’re planning for your business as well as yourself.
Here are four tips to keep in mind:
1. Establish personal & business financial goals.
Because the purpose of financial planning is to help you reach your goals, you need to decide what you’re trying to obtain. It’s best to make these decisions with your family or business partners.
First, get with your family and decide what short-term and long-term goals you have for your finances. Do you want to buy or build a home? Do you want to go on a nice vacation every year? Are you planning to save for college for your children? When do you want to retire and what will retirement look like? How much money will you need for retirement? Once you set your priorities, you can begin to plan for those goals.
For your business, you’ll still need to set goals. How big do you want to grow? Do you want to get to the point where your business provides a passive income? While these goals are a big part of business financial planning, you also need to take into account how you’ll run your business. Are you setting aside money for taxes? What will happen when you (or a partner) leave the business? Do you have funds to pay your employees?
Determining what you want from your life or business can help you and a certified financial planner determine what steps you need to take to reach those goals. We’ll focus on business financial planning for the rest of this article, but talk with a financial planner to determine how you can meet all of your goals.
2. Set up a safety net.
Owning a business is a risky endeavor. Changes in the market can affect your business and leave you powerless. In order to brace for these changes, it’s smart to set up a safety net. With your financial planner, determine how much money you should set aside for your safety net.
One of the best ways to build a safety net is to diversify your income. This way, if one aspect of the market crashes you don’t lose everything. Typically small business owners have their money tied up in their own business, but you need more than that to build a safety net. Learn about different investments (stocks, real estate, precious metals, securities, etc.) so that you have multiple income streams. When you diversify your portfolio, you carry less risk.
3. Plan for your retirement.
Retirement planning is an essential aspect of financial planning, especially for business owners. Just because you love what you do doesn’t mean you want to do it until the day you die.
People who work for someone else often have retirement benefits through their job, but business owners don’t have that luxury. They have to plan for retirement on their own, which is why it needs to be on your radar. There are many different retirement options (401k, IRAs, etc.). Speak with a financial planner about which option is best for you. You’ll also want to look into the best way to fund your retirement plans. Since you don’t have your employer contributing, learn how you can contribute the maximum amount.
4. Plan for your current business needs.
As a small business owner, you have a lot of financial responsibilities. You aren’t just responsible for making money; you’re responsible for taxes, employee wages, business assets, and the list goes on. Here are a few things to keep in mind when you’re planning for your business:
Taxes should always be at the forefront of your mind when it comes to business finances. You should always be setting aside at least 25% of your income for taxes. You also need to make sure you’re paying estimated quarterly taxes.
Different business entities (sole proprietor, S corp, LLC, etc.) all have different tax responsibilities. Make sure you know what your business entity requires. An accountant can help you determine how much you need to be setting aside for taxes according to your business type and can help you strategize how to maximize your tax return. If you have questions, reach out to our team at Mazuma USA. We specialize in helping small businesses save time and money on their accounting, bookkeeping, and taxes.
When you are planning finances for your business, you need to factor in the cost of doing business. Every business has expenses, whether that be the expense of creating a product, employee wages, rent, equipment, etc.
It’s important that you find a way for your revenue to outweigh your expenses. Without that, you’ll never have a successful business.
Setting up a succession plan, which includes strategizing around how to develop and grow future leaders in your company, should be a part of your financial planning. Although it doesn’t directly relate to finances, it can carry a lot of liability. You’ll want to make sure that your business has a succession plan for a number of scenarios: business partner leaving the business, death of a business partner, retirement, expansion, etc. No matter what the situation is, you’ll want to have a plan in place so that your business doesn’t suffer. Learn more about succession planning in this informative post.
There are a lot of other aspects of financial planning that small business owners should consider. It’s best to go over these with a professional to ensure you don’t overlook anything crucial.