Financial Planning For Small Business Owners

What is financial planning for small business owners?

Financial planning for small business owners involves creating a roadmap for the financial future of their business and managing their finances in a way that helps them reach their business and personal financial goals.

As a business owner, you know that your most important financial asset is your business. Financial planning is critical for small business owners to ensure that their businesses remain sustainable and profitable in the long run. It can be hard to set aside time to manage your personal finances, mitigate financial risks to your business, assess your tax situation, and save for retirement. That’s where a financial advisor can help.

A good financial planner will help you clarify your goals and determine where you want your business to be in the short term and in the long term. They will help you determine how much money you need now and in the future, for things such as business expansion and retirement planning. 

The result of financial planning is a well-thought-out long-term financial strategy that includes a set of goals with actionable steps to achieve your personal and business financial goals. A small business financial planner can help you put your financial life together, giving you peace of mind knowing that your finances are secure so that you can focus on growing your business. 

Here are eight financial tips for small business owners from a financial planner: 

1. Separate your business and personal goals

Personal: What are your immediate personal priorities? Do you want to fully fund your child’s college expenses? Do you want to retire at 55 and enjoy the fruits of your labor? What are your 5 and 10-year financial goals?

Business: Where do I want my business to be in 10 years? Do I have the right people in the right seat? Am I spending enough time on sales and marketing? Do I want to provide a retirement plan or health insurance to my employees?

These are just a few of the questions that you should ask yourself when you are creating your business and personal goals. Once you know what your goals are, then you can map out the steps you need to take in order to achieve these goals. 

2. Cash flow analysis

Cash flow analysis is essential for any business. A healthy cash flow is important to make sure that your business keeps running. You should perform a formal cash flow analysis to know how much money flows in and out of your business. Find ways to generate more cash, like reducing the time it takes for your customers to pay you.

3. Manage taxes

Tax planning can be very complicated for small business owners. You don’t want to get hit with a huge tax bill. It’s best to hire a tax planning professional. It will not only free up your time but it may also reduce your tax liability. A CPA will know the tax laws in your area. Financial planners can also help with big-picture tax planning and crunching the numbers on estimated tax payments.

4. Small business retirement planning

Many small business owners assume they will never retire but this isn’t the case. Retirement is an inevitable part of the future.  Retirement planning is essential for small business owners who want to secure their financial future and ensure that they have enough money saved for retirement.

Establish a tax-advantaged retirement account for yourself: Many experts recommend saving at least 15% of your pre-tax income in a tax-advantaged retirement account. Below are some  of the best self-employed retirement plans:

• IRA: Anyone who earns an income can open an IRA. You can choose between a traditional IRA or a Roth IRA. A traditional IRA offers an up-front tax break and a Roth IRA provides tax-free income in retirement. The 2023 contribution limit for an IRA is $6,500 or $7,500 if you are aged 50 and older. There are income eligibility limitations.
  
  
• SEP IRA:  This is a version of a traditional IRA that offers similar tax benefits. Any employer, including sole proprietors, can set up a SEP IRA. This can also be extended to your employees if you have any. The 2023 contribution limit is up to 25% of your compensation, with a maximum of $66,000.
  
  
• Solo 401(k): If you do not have any employees, then you may want to consider a Solo 401(k). You make contributions as both an “employer” and as an “employee,” providing you with the ability to save more. As an employee, self-employed individuals can contribute up to $22,500 in 2023, or $30,000 for those 50 and older. As the employer, individuals can also contribute up to 25% of their net income from self-employment. The 2023 annual contribution limit is $66,000 or $73,500 for those aged 50 and older.
  
  
• SIMPLE IRA: A SIMPLE IRA is designed for people who are self-employed or who have less than 100 employees. You can contribute up to $15,500 in 2023, or $19,000 for those aged 50 and older. As the employer, you can also contribute either a 2% fixed contribution or 3% matching contribution as an employer-sponsored match to the plan. A self-employed individual can contribute both as an employer and an employee.
  
  

Do you have old 401(k) plans? If you have 401(k) plans from previous employers and want to consolidate them, then you should consult your financial advisor to weigh the pros and cons. You should also evaluate your overall financial portfolio and risk tolerance.

Offer a retirement plan to employees: If you have employees then it’s important to search for the right type of retirement package for your team. This will help you attract the right talent. Your business may also be eligible for an immediate federal income tax deduction if you establish and fund an employer-sponsored retirement plan.

The three most common retirement plans that small businesses with employees can offer include:

• SEP IRA: A SEP plan is a retirement plan that allows employers to contribute to their employee’s retirement accounts. It is designed to provide small business owners with an affordable, yet easy-to-manage retirement plan that offers benefits to both the employer and employee.
  
  With a SEP plan, employers can contribute up to 25% of an employee’s compensation or a maximum of $66,000 (for 2023), whichever is less. This retirement plan can help small business owners provide a secure retirement for their employees, while still keeping costs low.
  
  
• SIMPLE IRA: A Simple IRA plan is a retirement plan designed for small businesses with 100 or fewer employees. It allows employees to contribute a portion of their salary to the account, and employers are required to match a portion of those contributions.
  
  This plan offers numerous tax advantages, making it a great choice for both employers and employees. For employers, contributions are tax-deductible and can reduce their taxable income. Employees benefit from their contributions being pre-tax, meaning they pay less income tax, and any earnings on the contributions are tax-deferred until it is withdrawn.

  The SIMPLE IRA contribution limit is $15,500 for 2023, or $19,000 for those aged 50 and older.
  
  

• Regular 401(k): You can also establish a regular 401(k) for yourself and your employees. You will have to find the right 401(k) vendor who can offer good investment options, can take care of the IRS paperwork, and have reasonable fees.  You and your employees can contribute up to $22,500 in 2023, or $30,000 for those 50 and older. You can also establish an additional profit-sharing scheme. A savvy financial planner can help guide you with this.
  
  

5. Create employee benefits to hire and retain good talent

Providing employee benefits is essential to hiring and retaining good employees. Some additional benefits that you may want to consider as part of your employee benefits package include:

• Health insurance
• Life insurance
• Paid time off (PTO)
• Flexible work schedule
• Paid family leave
• Dental and vision insurance
• Disability income insurance
• Long-term care insurance
• Professional development
  
  

6. Make sure that you have insurance for your small business

It’s important to prepare for the unexpected, especially when you are a small business owner. Some insurances that you may want to consider include:

• Insurance for physical damage: property and casualty insurance provides losses due to physical damage or the destruction of your business.
  
  
• Life and disability income insurance: You can purchase life insurance and disability income insurance to cover you, with the business named as the beneficiary. Upon death or disability, the policy will pay your business a certain amount of money, which it can then use to cover its normal operating expenses.
  
  
• Asset insurance in the event of a lawsuit or threat: With a liability insurance policy, the insurance company will pay third parties who claim they were injured on your property or damaged by your product or service. If a lawsuit is threatened or filed, the insurance company will hire and pay a lawyer to defend you. The amount paid for both of these scenarios will depend on your policy limit.
  
  
• Business owners policy: A Business Owner’s Policy (BOP) combines business property and business liability insurance into one business insurance policy. It helps cover your business from claims resulting from things like fire or theft. Business owners’ insurance helps cover claims related to personal and advertising injuries.
  
  
• Employment practices liability insurance: This will cover legal expenses if an employee sues your business for things like discrimination, harassment, and wrongful termination.
  
  

7. Create an estate plan

Proper estate planning helps to provide for your loved ones, business partners, and employees who rely on your business. It can also provide clear instructions on how the business should proceed if something happens to you.

8. Take advantage of tax deductions and credits for small businesses

As a small business owner, you may qualify for some tax deductions and credits that many large corporations don’t qualify for. To deduct a business expense, it must be ordinary (common and accepted within your business/trade) and necessary (helpful and appropriate for your business/trade). Here are some of the most common small business expenses.