The #1 Financial Planning Mistake Made by Business Owners (And How to Fix It)
As a financial advisor in Gilbert, AZ, you’re able to see a complex financial situation in a different way.
When you’re a business owner, your company is like your baby. We see clients pour 100 percent of their time, money, energy and focus into nurturing their business and giving it the fuel it needs to grow. You may put in 12-plus-hour days, working frantically to get as much done as possible. Even after you’ve called it quits, your mind still races with thoughts on daily operations, growth opportunities, acquiring ideal customers – it doesn’t stop.
That’s why it’s no surprise that the #1 financial planning mistake made by business owners is putting their business’ finances ahead of their own. It’s such a natural thing to do, yet it can wreak havoc on your long-term financial security.
Just as you’d tell a parent, you can’t help your children if you’re not taking care of yourself! Your business baby is no different.
3 Reasons Why You Shouldn’t Put Your Business Finances Ahead of Your Own
You may be thinking, “Why is putting my business finances ahead of my own so bad? I need to run a successful company in order to eat and provide for my family. There’s nothing wrong with that.”
But when you fail to focus on your personal finances, you increase your probability of running into one of these situations down the road:
- You choose to retire or are forced to retire, only to find out you didn’t save enough to sustain your lifestyle.
- You overestimated the value of your business and don’t have enough proceeds to live off of in retirement.
- You don’t have a proper transition or exit plan in place, so your business ends up crumbling when you’re no longer around to take care of it.
How to Correct This Mistake
If you’ve neglected your personal finances up until this point, it’s not too late to turn things around. The team at Watts Gwilliam and Company has compiled the following key steps to help change your financial trajectory. You may also find this new guide helpful: Financial Planning for Business Owners.
Ready for a second opinion? Contact the team at Watts Gwilliam and Company and get the conversation started.
Start a Retirement Plan
As a small business owner, there are a lot of really great retirement plan options available to you – options most “regular” employees don’t have access to. Not only is implementing a retirement plan a great way to build a safety net for your future, but it can also help shield more of your profits from taxes.
There are 3 common retirement plans you have access to as a small business owner:
1. SEP IRA: Beneficial for business owners with 0 to 20 employees, a SEP IRA has no operating or startup costs and allows you to save up to $58,000 or 25 percent of your salary, whichever is less.
2. SIMPLE IRA: Beneficial for small business owners with up to 100 employees, a SIMPLE IRA allows employees to contribute up to $13,500 a year and, as their employer, you give a mandatory 3 percent match or 2 percent non-elective contribution.
3. Solo 401(k): Designed for solo-preneurs and their spouses, a “Solo” or “Self-Employed” 401(k) allows you to defer up to $19,500 of your salary for retirement, plus contribute up to 25 percent of your salary or $58,000, whichever is less, in profit-sharing contributions.
For more on these and other retirement plan options, read our recent blog post: A Business Owner’s Guide to Retirement Plans.
Have Proper Insurance
In our experience at Watts Gwilliam and Company, we’ve seen a lot of business owners scrimp on life and disability insurance because they think their family could just sell their business and live off the proceeds if something happens to them. But the truth is, without you, your business may be worth a lot less than you think.
It’s important to get proper insurance policies in place to protect you, your company, and your family from any unknowns that may be lurking on the horizon. Some common types of small business insurance you may need include keyman life insurance, disability insurance and professional liability insurance. Discuss your situation with your financial advisor to see what coverage makes sense.
Get a Valuation on Your Business
Do you know how much your business is worth? When was the last time you had a proper valuation? Getting an annual valuation on your business is critical, as it allows you to:
- Secure additional financing
- Sell your business for a fair price
- Add or buy-out shareholders
- Establish a partnership
- Accurately report taxes
There are several different methods you can use to determine the value of your business. Using realistic numbers in your retirement plan can better help you plan for the future.
Create an Exit Strategy and Succession Plan
Even if you’re one of those business owners who say you’ll never stop working, the day may come when your business will have to change hands, whether it’s because you choose to retire, you’re forced to retire, or you pass away.
Have you thought about what that transition will look like when the time comes?
Will you pass the business on to a family member or a key employee? Will you sell it outright and invest the proceeds? Regardless of what you choose to do, a succession plan and exit strategy can help make the transition go smoothly.
Make sure your succession plan identifies key family members or employees who would become your successor after you leave the business. Your plan should focus on how you’d transfer leadership to these individuals and how you plan on nurturing their skills so they’re ready to take over when the time comes.
An exit strategy is a broader analysis of the company. It outlines a plan for how you’d deal with any of the five Ds – death, disability, disaster, divorce and disagreements. Often times, succession planning is part of an exit strategy, but succession planning can also include strategies you’d use to exit a failing business, navigate bankruptcy, and deal with IPOs, acquisitions and buy-outs.
Work With a Small Business Financial Advisor
Studies show that around 20 percent of businesses fail in the first year, 50 percent fail within the first five years, and 70 percent fail within the first decade.
With numbers like these, why wouldn’t you want professional help?
As a financial advisor in Gilbert, AZ, our team at Watts Gwilliam and Company can help business owners manage the many complexities of their financial lives. As a business owner, there’s a lot to account for!
Don’t put your financial planning on the back burner. There’s too much at stake. If you’re looking for someone to help you manage your business and your personal finances, let’s talk. A simple conversation can have a big impact.