Becoming a business owner is not easy. One of the biggest hurdles for a new NYC business is how money is handled, especially in the first years of business operations. It is important that each individual business owner be secure in the finances before starting a business. It is common for new businesses to be in operations for years before becoming profitable and accumulating a sufficient customer base.
Therefore, financial planning for business owners must be done in a way that will meet your needs before, during and after the launch of your business.
Financial Planning for Business Owners: Years One to Four
For the first few years you are in business, it is important to balance the needs of your growing business with your ability to meet your personal obligations. During the first few years, your business is likely to demand a lot of time, effort and capital. Financial planning for business owners must prepare you for handling financial issues as they arise.
Managing Cash Flows
For new businesses, managing cash flow is of the highest importance. In the first few years of business, the goal of the business should be finding new customers and creating a positive reputation. There are costs to acquire new customers and to keep the business operating, even when there is little to no income. While taking on debt to finance operations is tempting, that debt turns into another expense. Adequately managing cash flows ultimately determines if a business succeeds or fails. Take care to limit expenses whenever possible and to funnel income into business operations.
Taking a Salary
In the first few years of business operation, it may be to your advantage to not take a salary, or to take as little out of the business as possible. This is the case for several reasons:
- Taking money out of the business reduces cash flows and can inhibit the business’s ability to continue operations.
- When a salary is taken, the business incurs payroll taxes in addition to the operating expense.
Once the business is profitable and business income covers expenses and investments back into the company, business owners should begin to consider taking a salary. This is why it is important to save prior into starting a business. You may need to use your savings to handle your personal expenses until your business becomes profitable.
Personal Goals
Financial planning for business owners should include a personal financial planning process. It is important that personal goals be realistic and reflective of the personal situation and the condition of the business. Pay particular attention to saving money for both short-term and long-term needs. The assistance of a certified financial planner can be useful to help outline a plan that takes into consideration your goals, the needs of your business and potential tax implications.
Financial Planning for Business Owners: Years Five to Nine
Once your business is established, the way your finances are managed should change. While managing cash flows will always be important for your NYC company, by this point business owners should feel comfortable taking a salary. Your financial planning process should take into consideration the stability of your organization and what that means for your personal finances.
Planning for Retirement
Even with a business that you love, most people do not plan to work forever. Retirement planning is a crucial step in planning for your long-term future. Take some time to understand how much money you need for retirement in order to maintain your current lifestyle. There are a number of online tools that allow for predicting how much money you will need at retirement and outlining what is necessary to accumulate that wealth. In the same way you plan for the future of your business, you need to think about your financial needs for the future.
Saving for Retirement
Once you understand where you need to be in order to retire, you must start saving towards that goal. Good ways to begin saving is through contributing to an IRA or by setting up an automatic savings plan. This retirement plan should be separate than your succession plan for your business. Many business owners view their businesses as their retirement plan. And while planning to sell your business is an important part of the financial planning process, it may not provide everything that you need in retirement.
Review Your Investments
Having a diverse financial portfolio is especially important for business owners. Because your financial status is largely connected to that of your business, it is important that your level of risk is matched to your needs. It is a bad idea to try and time the market or engage in other practices that are marketed as ways to earn large amounts of money in a short time frame. These practices come with great risk and can jeopardize the savings you’ve worked hard to accumulate.
Review Insurance Coverage
Review your insurance coverage for your property, business and life. Be sure that your coverage is sufficient in the event that a disaster was to occur. Purchase additional insurance where gaps exist in order to ensure that all risks are mitigated. Business owners often overlook insurance coverage. But when your business provides income for your family and a disaster strikes, your family may have a hard time maintaining their standard of living without insurance protection.
Build Your Succession Plan
You plan to use your business as a way to pass down wealth or as a way to finance retirement. What is the process for that to occur? Your succession plan should detail how you plan to exit the business. If passing down the business is your goal, consider what steps can be taken now in order to reduce tax liabilities and to ensure your desires are in writing. If selling the business is your ultimate plan, how do you plan to make that happen? Make sure that your plans are well documented and known by your family. This will save both you and them from stress in the future.
Financial Planning for Business Owners: Year Ten and Beyond
Your business is established and is now able to fulfill both your company’s and your personal financial needs. Now what?
Estate Planning
Similar to succession planning, you should have an estate plan for your personal assets. Having a solid estate plan in place can limit the amount of taxes your estate incurs and increase the amount of wealth that you are able to pass on. It is important to work with a qualified team that is able to consider the financial, legal and tax implications of your decisions and provide solid advice based on that information.
Review Your Financial Plan
Your financial plan should be reviewed on an ongoing basis. As your situation changes, your financial plan should be adjusted to reflect your current situation. This is particularly important for the level of risk in your portfolio. Actual risk should be determined by your personal risk personality and the number of years you have until retirement.
