Financial planning is an essential step to take if you want your small business to be successful and increase your net worth. Even if you feel like you’re doing everything right, there are still some steps that only a seasoned professional will know about.
More than half of the United States’ workforce is now employed by small businesses, yet many people overlook their financial needs. To succeed, every business needs to be able to borrow money. We need to pay insurance for every business asset like goods, office premises as for House and Car insurance. It will make you more financially stable in case of any unwanted happenings. It also needs to understand how important it is to save for retirement and other expenses. With these factors in mind, here are some ways for you to start planning your financial future today. The basic financial planning formula is that “Cut your coat according to your cloth, i. e. your expenses must be under your budget. Following are some basic steps which every business should follow while making the financial plan –
- Step 1 – Make the estimate of incoming revenue
- Step 2 – Set up a Budget for the expenses
- Step 3 – Get the Insurance of every possible business risk.
- Step 4 – Save the money for the future needs
So that is the basic financial planning, now let us see what our experts tell us about.
Hamna Amjad, Physicians Thrive
Financial planning is crucial for every business, especially if you recently started. We wouldn’t want to end up losing our hard-earned money.
Here are my proven practical tips for small businesses: Create a detailed plan and back-ups; most importantly, don’t spend every cent right away. Always talk to your people and listen to their inputs before deciding. Decisions can either get you to the top or ruin your business. Always separate your money from business money. Mixing them will create a huge problem.
Ezra Cabrera, SMB Compass
One of the most practical pieces of advice we give to small business owners in the context of financial planning is to keep their cash flow in check. Many entrepreneurs are not able to manage their finances well–they don’t see the complete picture of the inflow and outflow of their cash. This can be detrimental to their company’s growth because they’ll never know the exact financial health of the business, limiting their ability to make strategic decisions.
Christopher Liew, Wealth Awesome
As the owner of a site that focuses a lot on business, this question comes up a lot during my research and interactions with my readers. I definitely know a thing or two about financial planning for small businesses!
Based on research, 33%of the world’s adult population is financially illiterate. This is why we need to teach people and businesses about financial planning.
Two Financial Planning Tips for Small Businesses
#1: Form a corporation and raise money.
Setting up a corporation has several advantages over setting up a sole proprietorship in reality. You can raise money without incurring liability via the sale of the shares of stocks of the company. This is possible because the money raised from the sale of shares is considered equity. You don’t have to borrow money from banks or financial lending institutions that charge high-interest rates accordingly.
#2: Conduct a feasibility study before setting up your business.
It is important to conduct a feasibility study to know if there is indeed a demand for the products and services that will be offered by your business. It is also important to know if the operations of the business are sustainable. The feasibility study should include market research and financial analysis based on projections on sales, production, and distribution. Technical and legal aspects should also be included in the feasibility plan.
John Russell, Russell & Co.
Risk Evaluation & Management –
If you’re a small business owner you need to properly mitigate and identify risk. This is one of the most crucial and important tasks that often gets overlooked, mainly because creating a large list like this with all of your potential ‘doomsday’ situations can be quite a daunting and unpleasant task. It’s also nigh on impossible to properly identify every possible risk your business could fall foul too, however, you can easily put good crisis plans in place. When creating a risk management plan it’s important to remember the following things.
Always craft cash flow contingency plans in the event that a business comes to a halt due to a disaster situation, like the passing away of a key individual.
If you are the victim of theft or fraud by a supplier, client, employee, or another third party, how will you cope?
It’s vital to ensure you provide the correct amount of coverage for both your employees and yourself without overpaying for things like healthcare and even workers’ compensation.
Hutch Ashoo, Pillar Wealth Management LLC
My recommendation for financial planning is to seek outsourced assistance with tax management.
While doing it yourself may work for personal finances, tax preparation as a small business owner can be far more challenging. Outsourcing tax planning and preparation to a trained, certified public accountant (CPA) or other financial professionals who are assisting you with your business will not only save you time but may also result in a lower tax bill.
A CPA is intimately familiar with the tax regulations in your area and can advise you on numerous techniques, including how to optimize qualifying business costs and the amount to pay in anticipated taxes to avoid a large payment.
Christopher Morgan, Credit Help Info
Separate Bank Accounts for Professional and Personal Use
The number one rule of having a business is to keep your professional, and personal bank accounts different. This allows you to easily track business transactions, thus, maintaining an accurate bookkeeping log. Just imagine that you’re able to file tax returns quickly and without any error. Having a separate business account will help you achieve that.
It is important to understand that having a solid bank balance does not tell you everything about your company’s cash flow. What makes things easier to handle is a separate business account. This lets you immediately know about your current cash situation and react accordingly. Additionally, regardless of the company you have, it is essential to maintain credibility. Using a business bank account to make and receive payments leads to a greater level of trust with clients.
Lattice Hudson, latticehudson.com
Budgeting for smaller companies and developing successful financial solutions are not simple chores. Conventional cash flow tactics are difficult to implement due to tight budgets or intermittent and irregular labor. Irrespective of your business’s framework, creating and keeping to a financial plan will always be a critical step in guaranteeing its long-term viability.
Your corporate ambitions may conflict with your ambitions; for example, development might need additional financing, which is the complete antithesis of your aim of conserving. It’s not always easy to strike a fair balance, but recognizing and appreciating the importance of corporate financing may help you channel the competing power of private fortune to operate for yourself and your company.
What occurs if you choose not to be a representative of your company any longer? Evaluate unforeseeable occurrences such as divorce, financial troubles or maybe even death when declaring you’ll never close shop. Unforeseen things can alter the course of your organization, jeopardizing employees, operations, and income sources. Having a solid strategy in place for your leave, either planned or unforeseen, may secure the company’s and its employees’ long-term security.
Jeff Mains, Champion Leadership Group LLC
Financial planning for small businesses and the implementation of effective budgeting practices are not simple tasks. Small sales and profits and unpredictable and seasonal labor make it challenging to use traditional financial planning tactics. However, irrespective of your organization’s business structure, developing and adhering to a yearly budget for your enterprise has always been a critical step in guaranteeing its long-term viability and sustainability.
One best piece of advice that I can share with you is to Prepare for Upcoming Internal Expenses.
Large expenditures may catch companies off guard and cause even the most meticulously planned small company budget to go out the window completely. Take a peek around to see if you can spot any that you could encounter throughout the year. Whatever it is, if you have a reasonable expectation that anything in your current environment will need updating, replacing, or upgrading, you should include it in your small company financial planning estimate for the year. If you prepare for it, it will not be able to catch you off guard, and you will be prepared to handle it with ease.
Jenna Carson, Money Lucid
The most important aspect of financial planning for a small business is ensuring the capital is in place and that it’s a sustainable amount of money to support your business plan and any future growth that you are hoping for.
If a small business has a financial structure and plan based around borrowing money and debt, it can put unnecessary pressure on the business and even force the business to take decisions that don’t typically align with its values. If capital isn’t in place when it’s needed, then a small business should consider funding pipelines and fundraising sessions as part of its financial planning.
Greg Rozdeba, Dundas Life
Draw a Line Between Personal and Business Goals
Sometimes, it is hard to prioritize between personal and business goals due to a lack of financial planning. You need to be sure how to differentiate between the two because if you don’t, it will cost you in the long run. So, the best way to proceed is by separating your finances. It will help keep an accurate track of your business cash flow.
Moreover, begin with visioning and setting your goals and priorities for your business and personal expenditures. It will make your accounting more efficient, as you can easily calculate taxes in both accounts. The relevant information for your business tax statements can be checked quicker by the integration of accounting software like QuickBooks.
This software enables you to simultaneously check different accounts in the same or different banks. Another smart way to prevent any error in bookkeeping is by personalizing accounts with names like receivable accounts. It will save up time and energy to keep a check on all transactions.
Donna Atanasova, myPOS.
Avoid mixing business and personal finances: separating your business and personal finances should be one of the first steps you take. By doing so, you’ll ensure that neither type of finance suffers at the expense of the other. In addition, by separating the two into separate accounts, you’ll have a stronger audit trail. This will help you plan better when it comes to taxes. Furthermore, you’ll create clearer mental boundaries between the two, ensuring you manage each account according to what its needs are. As an extra, you’ll be practicing financial discipline.
And a final tip, but not the least important, is that you’ll be able to protect your assets from financial liability. This is the case even if you’re a sole trader whose personal and business assets are considered one and the same thing by the authorities. However, if you have a personal account and a business account, you’ll be much better able to distinguish between the two, ensuring there’s no mixture of the two, enabling you to run both your personal and professional life more seamlessly.
Chris Russell, Tempus Pecunia
Financial Planning Advice for Small Businesses (& Owners) primarily consists of 3 key aspects:
- Tax planning
- Risk management
- Cash flow & balance sheet management
Business ownership provides the largest opportunities for tax savings that exist in the tax code. It is incredibly important for small businesses to understand the taxes they must pay – income tax, sales tax, payroll tax, etc. – and understand the tax deductions that are available to help minimize the tax liability. Central to this is establishing a good accounting system through a provider like QuickBooks, Xero, etc., and establishing a relationship with a CPA / accountant. A comprehensive tax plan can mean substantial savings for any business, which can make or break a small business.
Selecting the proper type of business entity is a core component of tax planning and also should be considered for the second item, risk management. Business owners should carefully consider the various entity types available to the – sole proprietorship, partnership, LLC, and S or C corporations – for both tax implications and asset protection. For example, a sole proprietorship provides no protection for the owner’s personal assets, while other entity types like LLCs or Corporations can be set up to shield the owner’s assets from business liabilities.
Continuing on the risk management topic, small businesses should understand the risks that are inherent to their business and find the right tools and strategies to mitigate those risks. Generally speaking, business insurance policies will be used to provide those protections. For example, a beverage manufacturer has a different risk profile than a professional service provider, and each should have a risk management plan specific to their business risks. That said, almost all businesses have liability risk and should have general liability insurance coverage, as well as other baseline coverages.
Finally, cash flow and balance sheet management are crucial in financial planning for small businesses. Cash flows (i.e. income and expenses) are the basis of all financial planning, so everything starts there. Without adequate cash flow, the business must borrow while building revenue, or the business will fail. Alternatively, businesses with ample cash flows want to make sure that they are saving enough for future capital needs and/or decreases in cash flow (covid related disruptions being a prime example of these unforeseen cash flow issues).