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Financial Planning

To Succeed, Small-Business Owners Need to Put Their Own Finances First

Many business owners put everything they have into their businesses, and in doing so forget to make a plan for their own personal finances. That's a big mistake.

In today's rapidly changing and unpredictable economic landscape, small businesses are under constant pressure. This entails planning for the future or any surprises along the way. No one could have predicted the worldwide spread of COVID-19 and the disastrous economic impact it is having on all businesses alike.

Now more than ever, personal financial planning should be a core component of every small-business owner's daily priorities.

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Only four out of 10 small-business owners have ever consulted a financial adviser. Organizing a detailed personal financial plan can be just as critical to your personal success as a detailed financial plan is for your business.

The Importance of Personal Finance in Small Business

Small-business owners tend to be ambitious, hardworking, tenacious and highly focused. Why? Because if they're not, they'll end up part of the 91 out of 100 small businesses that fail within a decade. To secure a spot among the 9% of successful small businesses past that 10-year timeframe, you should prioritize both business finance and personal finance.

Even if your company does everything right, there are many risks and factors that contribute to its success or failure. For instance, if a business owner takes on too many distributions to support their lifestyle, they won’t be able to supply the necessary capital to grow the business.

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Saving money outside of your business prevents you from placing all of your eggs in the same proverbial basket. Personal investments and emergency savings are a critical part of ensuring you have all of the personal requirements necessary to continue to lead your business even when life presents unfortunate or unexpected events.

Implement Proper Benefits

The phrase "benefits" translates to much more than just health insurance and a 401(k). Even so, many small-business owners don't offer any benefits, let alone retirement planning options — and for good reason.

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In the first days of opening a business's doors, offering more benefits than you can afford can decelerate your company’s growth. However, as time proceeds and the business transitions from a wobbling crawl to a sure-footed stride, a lack of proper benefits can break both of its legs.

A focus on personal finance in addition to your business’s finance opens the door to a variety of benefit options that can attract top talent while boosting productivity.

Save Money Outside of Your Business

Many small-business owners consider their business as a part of their life, or rather an extension. Days, months and years have been spent pouring your heart and soul into your business. Unfortunately, this can be a self-sabotaging practice, as it leaves out the crucial, complementary benefits of personal finance.

Succession planning for small-business owners involves creating a plan for what happens when you’re ready to sell the business, hand it off or not lead it any further. While this phrase is often used in terms of mergers, acquisitions, sales, etc., it is also used to plan for your own personal future when it no longer coincides with the future of your business.

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"What comes next" is a question small-business owners seldom address, leaving them with nothing but debt to finance their retirement. Investing in a diversified portfolio and saving throughout your life ensures you can enjoy the same, or an even better quality of life when you decide to retire.

These outside retirement saving plans come in a variety of shapes and sizes. The standard 401(k) is often a great option for-small business owners, but also an IRA and, if you qualify for it, a Roth IRA.

Establish Business Credit as Soon as Possible

Many people work their entire lives to establish an excellent credit score. The same must be done for your business.

Early on in the business lifespan, apply for one or more lines of credit. As the years progress and your business income increases, the limits can then be raised on those lines of credit to better provide for financial flexibility in the years to come.

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This enables the company to grow without having to deplete your own private savings. Otherwise, you could end up zeroing your personal bank accounts, breaking the tips mentioned above and becoming an indentured servant to your own business.

Rates on lines of credit range from about 5% to 20%, making them unsustainable for long-term balance management. Short-term balance management via a line of credit can open the door to reliable financing of unexpected expenses, improved cash flow flexibility and more.

Re-evaluating Expenses

There will most likely come a time when you are focused on saving strategies, like in our current economic state. While assessing your spending, it is highly beneficial to go through an introspective re-evaluation of your values and goals with a four-step process:

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  1. Spend an hour by intentionally writing all of the values that are important to you (family, education, social impact, etc.) Then, whittle it down to the top 10. Then the top five.
  2. List your top 10 financial goals in order of importance.
  3. Create a monthly budget that categorizes all of your historical monthly expenses.
  4. Go line by line starting with the largest expenses first and determine which of your expenses are not congruent with your values from Step 1 or your financial goals in Step 2. If the expense doesn’t align with your goals or values, cut it from your budget.

It can also be valuable to go through this re-evaluation with a trusted financial adviser. Additionally, working with an adviser to handle your personal finances can free up time for you to better handle your business needs, cutting costs in the long run and ensuring you make the best possible financial moves.

The Necessary Next Step

If you would like to defy the odds and join the 9% of businesses that live past the 10-year mark, you are going to have to implement and prioritize solid personal finance strategies. Even in our current unstable economic state, it’s more important than ever for small-business owners to focus on bolstering their personal financial planning.

About the Author

David Flores Wilson, CFP®, CFA

Managing Partner, Sincerus Advisory

David Flores Wilson, CFP®, CFA, CEPA is a Managing Partner at Sincerus Advisory, a Registered Investment Adviser providing holistic, fee-only financial planning and wealth management services to families and individuals in the New York Metro area and nationwide. 

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