Many Americans have the creativity and entrepreneurial spirit to start their own small business. These individuals often use their own resources as initial capital and may sacrifice personal finances in order to grow their companies.
Financial experts applaud the drive and commitment of these small business owners, but warn that they must also consider their personal financial future.
Here are eight financial planning tips for small business owners.
1. Distinguish Between Personal and Business Goals
It’s important for small business owners to identify their short and long-term financial goals.
However, the lines between these objectives can get blurred, and individuals may compromise planning for their children’s education or retirement in favor of expanding their business.
2. Explore Other Funding Options for Your Business
The most difficult hurdle for many small businesses is securing funding, and entrepreneurs often turn to their savings, credit cards, or friends and family for start-up capital.
Financial advisors also urge owners to look for outside sources, such as a loan or offering equity in exchange for a good or service.
Another often overlooked way to finance a small business is through customer pre-sales or subscription services.
3. Generate Revenue That’s Greater Than Costs
A small business may not be financially viable because it’s unable to generate enough revenue to cover expenses.
In addition to making a company more profitable, it’s also essential that owners carefully track and analyze all of their costs.
4. Focus on Liquidity
While a company can have a great deal of resources on paper, it may not be very liquid.
Improving cash flow helps businesses grow, pay their employees, attract investors, and have available funds in case of an emergency.
5. Manage Small Business Taxes
The tax requirements for a small business depend on the company’s legal structure (i.e. sole proprietorship, S corporation, or LLC).
Experts recommend that small business owners utilize a bookkeeping software and consult with a CPA or tax attorney to better understand their federal and state tax obligations.
6. Planning for Retirement
To better align business and personal financial planning, advisors suggest a company retirement plan. A 401(k) plan allows for the highest contribution, and company matching is an excellent way to maintain employee loyalty.
7. Arrange an Estate Plan
Creating a will and family trust will ensure that an individual’s personal and business assets are properly managed in the event of his or her death.
8. Establish a Business Succession Plan
If a business owner must leave his or her position within the company, a business succession plan will enable a smooth transition in leadership and address many tax and financial matters.