Starting a business and working for yourself is the American Dream. Unfortunately, according to Bloomberg, as many as 80 percent of new businesses fail within the first two years. The majority of those businesses fail because the owners did not adequately plan for the financial hardship of starting and maintaining a business. Following a financial planning process for the different phases of your business operations can help you find success as an entrepreneur.
Financial Planning Process – Starting a Business
The most important part of starting a business is understanding and being ready for the financial expenses. Failing to have adequate savings or failing to correctly estimate expenses can be devastating. New business owners must consider each of the following:
Understanding Start Up Costs
It is important to understand the costs associated with starting your business. This includes owning a website and meeting all licensing requirements as mandated by local, state and federal law. You should consult with both a lawyer and an accounting professional to ensure you are meeting all requirements and that your business structure is in compliance with the law. Failing to have the proper documentation at the start of your business can derail your NYC company down the line.
It is important that you have the funds to perform these tasks up front. While financing can be an integral part of business operations taking on debt too early will restrict cash flows, increase expenses and hurt your bottom line.
Assessing Your Personal Expenses
The most important part of your financial plan is you. You will generate income for the business and you will be responsible for meeting your personal obligations while you build your business. Before starting your business, you must have a clear understanding of your monthly obligations. Aim to cut all unnecessary spending out of your budget. Then, determine how you will cover your monthly obligations.
Prior to starting a business, you should aim to have at least three months of reserves. This means that even with no income you would be able to pay your bills for three months. Additionally, consider other means of bringing in income, including part-time job and freelance work during lean periods. One of the primary reasons a business fails is because the owner did not have sufficient reserves. Planning a way to cover your personal expenses can help to avoid this fate.
Monitoring Business Expenses
In business, it is often necessary to spend money in order to make money. There are real costs for acquiring customers such as marketing. Be sure to maximize how you spend your company’s assets and work toward getting the biggest bang for your buck. Establish a budget for your business as well as a plan for how you will attract new customers. Then, manage your business to these standards.
Financial Planning Process – Business Year Five
Now that your business is established, your priorities can adjust. By year five, most businesses will be self-sustaining, enabling business owners to rethink their financial plan. The financial planning process now includes a way to grow personal wealth in addition to protecting the company’s bottom line.
Funding Your Retirement
Many business owners expect to use income from their business, or the sale of their business, in order to retire. Unfortunately, many business owners get to retirement age and discover that their plan did not work out exactly as they planned. Therefore, it is important to have retirement assets separate from the company. This may be accomplished with an IRA, SIMPLE retirement plan or a Keogh retirement plan. Speak with a certified financial advisor to determine the best course of action to meet your specific needs. Additionally, it is important to monitor the risk level of your portfolio. Be sure to make adjustments as needed to be reflective of your risk tolerance and the number of years you have until retirement.
Mitigating Your Risks
Business owners commonly underestimate how much insurance they need to protect their assets and to provide income for their families in the event of disaster. Starting with the fifth year of business, business owners should review their insurance coverage annually and make changes to eliminate gaps.
Establishing a Succession Plan
Succession plans are critical to the financial planning process. Without a succession plan, your business may cease to exist in the event that you are unable to run the company. Some business owners plan to retire by selling the company, but have done little to verify the company’s market value or to establish a plan to sell. Others plan to provide wealth on an ongoing basis by passing ownership on to a friend or family member. In either case, the succession plan must be in writing and clearly outline your wishes. Failing to do this can reduce your company’s worth and lead to a costly legal battle between your heirs and business partners.
Financial Planning Process – Business Year Ten
Chances are, by your tenth year of business you are well-established in the industry and community. You likely have a good grasp of the company’s financial well-being and have a vision for the future. By year ten, you should have a similar vision process for your personal wealth.
Updating Your Financial Plan
Your financial plan should be a living document that gets updated regularly and after life events, such as marriage, divorce or the birth of a child. The plan should be reflective of your wants and dreams in that moment and should be reflective of your current level of income. Your financial standing in year ten of your business operations is likely vastly different than your financial standing at the time the company was started. Be sure to consider the tax implications of changes to your financial plan. Working towards minimizing taxes protects your wealth down the line.
Creating an Estate Plan
No one likes to think of their mortality. However, creating an estate plan ensures that your assets are handled according to your wishes. Additionally, proper estate planning can limit the taxes your estate will have to pay for. Transferring assets early on provides a road to wealth for your family as well as decreases tax equity.
Working with a Financial Planner
Business owners are in unique financial situation. Therefore, the use of a certified financial planner who has experience working with business owners is key. These individuals are uniquely qualified to set up a plan that will meet your financial needs based on your circumstances.
Spend a Little
Business only make it to their tenth year of operation through hard work, good planning and dedication. Once you’re in the process of funding your retirement, take some time to enjoy some of the fruits of your labor. Take a trip or make the purchase you've been saving for. Now is the time to enjoy some of the profits from the NYC company you built.
