People seem to have a clear idea of what they want for themselves when it comes to financial planning for their personal life, but a lot of business owners ask me, what does it mean to do financial planning for your business?
Fundamentally, there are always six keys areas to consider, just like on the personal side. These six areas would include:
Current Foundation – This covers your debt, cash flow, cash reserves and how you manage your day-to-day business. This is where most new small business owners place most of their attention.
Risk Management – Whenever you see the word “risk,” just remember that it’s a fancy name for insurance. Without going into all of the types, insurance connected to your business is simply to protect everything relevant to your business, from computers and equipment to your actual ability to earn income and cover expenses.
Investing – Most people think of small business retirement plans as the only thing that falls under the investing category, but it can also address buying business-owned real estate and taking a laddered approach to organizing cash.
Taxes – With taxes, you want to make sure you’re taking advantage of all of the deductions, deferrals and depreciation you qualify for, and have a way to track and manage those things so you’re not stuck with a grocery bag full of receipts, come tax time!
Goal Planning – This starts to overlap with Strategic Planning; the distinction I make between the two is that ongoing financial planning will translate strategy into specific behaviors you perform every day that bring you back to your financial goals, and then monitor progress.
Succession Planning – For most people, the idea of transition OUT of their business is VERY far away. Succession planning asks how you plan to finish this business both as planned and in case of emergency.
Business financial planning covers a lot of territory; for young entrepreneurs, there are 5 steps they can take-not encompassing ALL of these areas-but 5 steps that really take them from acting like a “hobby-preneur” to an established business owner:
Use financial management software. I know a lot of entrepreneurs in the early years just hold onto receipts for tax time, and believe me, you cannot understand your profitability until you have an ongoing system that captures income and expenses. It doesn’t have to be complicated and Intuit even has a Sole Proprietor Quick Books version, but this is an issue of respecting what you inspect and using it to plan your next moves.
Hire a bookkeeper. The best money I ever spend is on SOMEONE ELSE to keep my books organized so I can go do the thing that I do well-and I don’t think ANYONE who is not a bookkeeper should be spending time balancing accounts and categorizing expenses. You can spend as little as $100 per month, but I encourage you to build it in to your budget early on, so that it becomes an expectation that you’re never stuck working on it yourself. And, make sure your financial management software has online access, because a lot of bookkeepers will give you better rates if they can access your stuff online, versus coming to your home or office.
Keep finances separate. Admittedly, there is an easy way to allocate personal spending when you’re tracking it, but why create the problem? Your income is REVENUE MINUS EXPENSES. Get a separate account at your same bank that you have your personal account at, and it’s simple. Also, if you have a business structure other than sole proprietor, you can lose your liability protection if the prosecutor can show that you were commingling. See your attorney if you have concerns about that!
Establish business credit. Even if you are a sole proprietor, I encourage you to get a Federal Employer Identification Number or EIN, even if you don’t intend to hire employees. The EIN is like your business’s social security number, and you can start establishing credit in its name apart from your own personal credit. When you get that separate bank account, open it in the name of the business and EIN, and then get the credit card that usually goes along with it. You’ll need to speak to an attorney to get your EIN, one who handles business formation, and they can also tell you the best business entity to use.
Find and exploit your key business drivers. When I go into a business, I can usually identify specific activities that the entrepreneur engages in to acquire more clients or sales, and with financial reporting, we can analyze, adjust and adapt behavior to get the result they want. When I coach other financial advisors, it always breaks down into more face time, which can translate into simply phoning clients to holding more marketing events, depending on their specific goals. With another client, his driver was scheduled appointments. We found he was at his capacity, so he brought in an associate and was able to schedule appointments sooner. Consequently, new clients didn’t have to wait as long to get into the system, and his income automatically went up 20%.