If you are like most small business owners, you went into business to sell a product or provide a service and not necessarily to be a financial planner. But the tough truth is that if you are going to create something that has real value you are going to have to address the financial elements.
The elements of a good financial plan fall into three key categories: cash management, tax planning, and retirement planning. Let’s take a quick look at what each one entails.
I always say there are three days in the life of a project that give me an emotional lift. The first is the day I make the sale, the anticipation of the project is a great feeling. The second day is the day I send the invoice, the anticipation of receiving the check is also exciting. But the best day, is when the check arrives. From a cash management perspective each of those days plays an important role.
Cash management starts with a understanding of how much money you have in the bank. (It certainly helps when checks arrive.) How much are you anticipating in the next 30, 60, and 90 days? (Those sales certainly help to boost those numbers.) And what will your expenses be to deliver the sales commitments you have made?
One way to look at this is to simply check your balance sheet, compare your accounts receivable to your accounts payable. That will tell you if you have enough money coming in to pay your bills. If not, you will need to look to your savings and other assets.
Cash management helps you identify when you will need cash to fill a gap and pay bills before a big payment from a client comes in. That’s when a line of credit from a bank at a reasonable interest rate will be very helpful. Too often, unfortunately, business owners wait too long to go to the bank, and end up covering the gap with a high interest credit card. The lesson is if your business is doing well, and you have cash in the bank, talk to your banker about a line of credit. You won’t pay interest if you don’t use it, but it will be there when you need it.
In addition to the cash in the bank, when your business starts to generate revenue, suddenly you need to think about tax planning. If you don’t, the IRS can take a significant amount of your profits. Often business owners confuse tax preparation and tax planning. They are not the same. Tax preparation is simply filling out the forms, tax planning involves making the right decisions to reduce your overall tax burden.
As your business matures, you may need to talk with a tax expert to make sure you are paying your fair share, but not more than you should.
As you are starting out it may seem strange to think about retirement, but it is never to early. While you may build a business someone wants to buy, don’t count on that as your only source of retirement income. Your financial plan should include retirement funds regardless of the long term value of your business. So set aside a little bit of your income every month to be sure you are ready when the day comes and you can’t or simply don’t want to work any longer. Creating a 401(k) for you and your employees is a great way to take a little extra money out of the business tax free and create an incentive for employees to stay with you over the long term.
Do you have a Team of Financial Partners?
You don’t have to do it alone, just as you outsource marketing, IT and legal professionals, consider adding a financial planner to your support team. Where do you start? If you don’t have one, I would suggest a banker!
Recently, Stephanie Ewing, of Key Bank, dropped by for a conversation about the characteristics of a good banker. Listen now