5 Keys to Creating an Effective Financial Plan for you and your Business

5 Keys to Creating an Effective Financial Plan for you and your Business

Jerry Mills in his book, “Avoiding the Danger Zone,” states that almost all business owners want four things from their business: 1) Increased Sales, 2) More cash and personal wealth because of the increased sale, 3) Personal time away from the business, 4) A successful exit strategy from the business. The mastery of your own time will determine whether you will be able to obtain the four goals. Unfortunately, the average business owner gets stuck working in the business, rather than working on it. Being a small business owner, I can attest to the fact that we can sometimes get so wrapped up in the details instead of the big picture. To run and grow a business successively, the business owner must know how to play to his/her strengths. What exactly should you do?

The responsibilities of any business leader include the ability to:

  • Be a visionary
  • Delegate
  • Troubleshoot
  • Build relationships
  • Ensure the team is happy
  • Define quality standards for the business

While all the responsibilities are important, being a visionary is key. Being a visionary is important because the business leader needs to ensure that his personal as well as the business financial goals are being achieved, and the performance is being tracked. Seeking the advice and partnering with a Financial Planner is a very smart thing to do. Having said that, I would like to share some insights into the key areas that should be addressed by any financial plan. According to Hank Cleare, Certified Financial Planner with the Financial Strategies Group, “Financial well-being comes from successfully applying the principles behind insurance, investing, retirement, estate planning, income distribution, and wealth preservation strategies.” For each of these areas, let’s consider how business ownership takes this planning to another level.

1. Risk Management: Most individuals need to plan for the financial risk of early death, disability, illness and infirmity, and liability or loss related to property ownership. Once an individual owns a business, however, the risks multiply to include: interruption of the business due to a disaster; death or disability of a person key to the success of the business; loss of business property; and lawsuits resulting from negligence or defective products. This last risk can be addressed in part by the legal structure of the business, but the others require specialized insurance coverage over and beyond what the owner holds for himself and his family. If the business has employees, worker’s compensation coverage becomes necessary as well.

2. Investment Planning: Most small businesses are self-financed by their owners, which results in the business becoming the owner’s major or only investment. Even when the owner has extra capital to make other investments, he may still prefer to put his money back into his business, where he feels he has the most control over his returns. Prudent planning nevertheless must be focused on diversification. Asset classes and investments must be carefully selected for the owner’s personal portfolio to offset the concentrated risk he is taking with the business.

3. Retirement Planning: It’s not uncommon for business owners to assume they will never retire. After all, they’re presumably doing what they love, so why not continue indefinitely? Alternatively, they may see the business as the only retirement plan necessary – as a source of capital that will fund their retirement needs. Thinking along these lines is generally a mistake: If anything, a business owner may need more retirement planning rather than less, to prepare for the time when he no longer can or wishes to work, and/or the business cannot fully provide for his financial needs. The good news is that business ownership affords all sorts of tax-advantaged ways to save for retirement, and the ability to put aside amounts considerably larger than what is permissible to non-business owners.

4. Estate Planning: If a small business grows and becomes a valuable asset, simple wills or family trusts set up for personal affairs may no longer suffice for the transfer of the business. More sophisticated financial planning techniques will be necessary to ensure business continuity after death, reduce any estate taxes assessed for the business, and to provide liquidity to heirs to pay those taxes. A reorganization of the business might be advisable to create different types of ownership for family members, and to make full use of IRS-sanctioned discounts in valuing the business for purposes of gift and estate taxes. Insurance trusts and charitable trusts can also play an important role in the efficient transfer of a small business.

5. Tax Planning: I will address the topic of income distribution and Wealth Preservation in the context of Tax Planning. The legal structure chosen for the business – sole proprietorship, partnership, limited liability company (LLC), or a corporation – will determine how the business profits are taxed. As a sole proprietor or single owner of an LLC, your business income is treated the same as your personal income, making tax compliance considerably simpler. Add partners or additional LLC members, and while again the business income flows through to the individual return, it is possible to split the taxable income (and losses) of the business in ways that can benefit multiple owners. S-corporation status can allow business owners to take some distributions of income without paying self-employment taxes, whereas C-corporation status entails separate taxation at the business level, at different rates from what the business owner pays on his personal return. To the extent that individuals and C-corporations have different marginal rates at different brackets of income, it is possible to coordinate the taxation of business and personal income in a way that provides the greatest benefit to both the business and its owner.

One point should be clear when it comes to financial planning for the small business owner: the do-it-yourself drive that helped you start your business will not serve you well when it comes to managing the many financial issues created by that business. This is where professional expertise often becomes necessary. You are encouraged to seek the advice of a Financial Planning professional.

Email me at DanYoung@b2bcfo.com to schedule a complimentary business consultation, or to get connected to a Financial Planner in our network.

Recent articles by Dan Young:

The 6 C’s of Business Credit

5 Marketing Trends that must be embraced in 2018

The New Tax Law – 13 Key Changes for 2018

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