Why? Well, starting and running a small business can oftentimes be very time-intensive and soak up all the time you have to devote to financial planning considerations. You may either not have a financial plan or wait until the last minute to develop some components of it.
But the best financial planning is done well in advance. You don’t want to wait until a tax deadline is looming to undertake tax planning, for example — because that almost surely means you won’t receive the full benefit of the tax advantages that might be available to you, and it may mean you’ll have to pay more tax than you would with appropriate tax planning advice.
What Is Comprehensive Financial Planning for Small Business Owners?
Tax planning is just one component of comprehensive financial planning. A comprehensive financial plan for small business owners consists of the following:
Cash flow and expenses – The building block of any financial plan is knowing how much cash is coming in vis-à-vis your expenses, every month. (You should know this for both you and your family and your business, separately.)
This component also ascertains that you have a sufficient cash cushion. Typically, financial planners recommend that business owners keep three to six months’ worth of cash in an easily accessible liquid account, such as a money market. If your business is cyclical or the outlook is uncertain, it may be advisable to consider keeping a year’s worth. (1)
Investments – It’s prudent to harvest cash flow above and beyond expenses and cash cushions and consider placing them in a varied portfolio of investments. A diversified portfolio should position you for maximum appreciation while also protecting you from market fluctuations to some degree.
Because diversification should protect you from market downturns in any one stock, sector, or environment, CFP® professionals may often recommend that business owners not place all their investments in their own company. It may also be a prudent idea to diversify beyond your own sector, beyond Illinois-based companies, and even out of the Midwest and potentially the United States.
Retirement – Small business owners should plan for retirement, even if they think they’ll be running the company until late in life. Your plans may change. Although it’s not pleasant to think of, your business may not be fully successful. Only half of all small businesses (2) make it to their five-year anniversaries. Plus, you may have to retire due to health or other concerns.
When choosing a retirement plan for yourself and your employees, you may want to consider getting a financial planner’s advice. Retirement plans typically play many roles in a small business: retirement savings, tax savings, and employee benefits. You want to make sure you maximize the role most important to you.
A Simplified Employee Pension (SEP) is relatively easy to set up and administer, for instance, and the allowable annual contribution, $57,000 (3) or 25 percent of employee compensation, is far higher than one finds in a traditional individual retirement account (IRA) or 401(k) plan. But you are mandated to fund employee accounts and your own accounts at the same level. (That is, you could not take 25 percent of your own compensation but fund employees at 15 percent of theirs.) While a 401(k) is oftentimes more expensive and complicated to set up than a SEP, it also provides more protection from liability for your own assets.
Tax planning – Business owners typically can save prudently on taxes by timing their equipment and other business purchases, any losses, and tax credits appropriately, among other factors. It’s very important to have a handle on how much you owe so you don’t incur unnecessary liabilities.
Business financing – Most businesses need financing at some point. Your financial plan should cover expected financing, where you expect to find the financing (bank, credit union, line of credit, friends, and family, savings), and debt service. It’s not uncommon for business owners to underestimate the credit they will need, so financial planners may recommend adding a minimum of 10 percent to your expectations.
Insurance – Insurance in a financial plan is part of risk management. At a minimum, you may want to consider having liability insurance, property insurance, and life insurance. It’s prudent to also consider investing in business interruption insurance, which can cover you in case of a catastrophe. You need workers’ compensation insurance if you have one or more employees in Illinois. (4)
Estate Planning – Estate planning is the arm of financial planning that takes care of later life and death. Business owners need powers of attorney to keep the business running should they become incapacitated. They should also consider creating a will because a successful business is often the largest asset in an estate. They should consider naming beneficiaries appropriately.
Business Succession Planning – It’s very important to consider developing an exit strategy for your business. Most crucially, it’s important to plan a succession that works. If you’d like to pass it on to your children and other family members, for example, you need to determine if your children want to run the business and if they’d be talented at it if so.
Finally, CFP® professionals can help with several other important areas. First, business owners should consider creating a personal financial plan as well, and the two should not be commingled unnecessarily. You may want categories that don’t apply to your business, such as educational savings for your children. Second, CFP® professionals can provide advice about the most suitable business structure. Some offer more protection for a business owner’s personal assets in the event of debts or lawsuits than others.
Goals, Goals, Goals
Financial plans for small business owners typically contain the above categories, but the importance of each and the planning for each will vary according to your goals. Goals are a crucial element in most financial plans, and each decision and step should take your goals into account.
It’s easy to see why. The goals of someone who wants to retire early and run a charitable foundation afterward will require very different plans for retirement savings, investments, and business succession than someone who plans to work until late in life and pass the business on to their children or sell it.
If you are a small business owner in Libertyville or the surrounding area of Illinois, Prism Planning Partners LLC is here to help! We are CERTIFIED FINANCIAL PLANNERS ™️ professionals committed to facilitating important questions so that we can help you explore all of your opportunities. We offer a broad array of financial planning and consulting services for our clients including small business owners.
Contact us today and let us illuminate your possibilities!
We will spend the time getting to know you and your goals. Then, you will jointly discuss a plan and actionable steps to achieve that plan.
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“Personal Financial Planning: As a Small Business Owner.” AICPA. https://www.aicpa.org/content/dam/aicpa/career/marketing/downloadabledocs/smallbusiness/sbtoolkit-personalfinancialplanning-pagexpage.pdf
“Financial Planning for Small Business Owners.” CFP Board. https://www.letsmakeaplan.org/blog/view/lets-make-a-plan-blogs/financial-planning-for-small-business-owners
“SEP Contribution Limits (including grandfathered SARSEPs)”. Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps. 9 Jan 2020.
“Workers’ Compensation Insurance: It’s the LAW.” Illinois Workers’ Compensation Commission. https://www2.illinois.gov/sites/iwcc/about/Pages/insurance.aspx
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