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As a small business owner, you are responsible for managing both your business and personal finances, which can seem overwhelming. You have to be concerned about your company and its future while ensuring that you have enough money to live on. In addition, you have to set goals and monitor both your business and personal expenditures and revenues. Therefore, consider the following tips on financial planning for small business owners.
Keep Your Business and Personal Finances Separate
Because your personal financial situation is at least partially dependent upon your business’s financial situation, you may be tempted to set goals and create a plan that encompasses both your personal and business finances. However, it is vital that you keep these separate. Set aside time to set detailed short- and long-term company goals, including your expected cash flows and budgets. Determine your desired revenues and profitability.
Then, create your personal goals. Are there any investments you are interested in, and when would you like to make them? Also, identify your retirement desires, including when you want to retire and how much you will need to live on. List any large purchases or debt-elimination dates and strategies you hope to pursue. Finally, determine how your small business can help with this, either through profit distributions or your salary.
Diversify Your Personal Investments
It is tempting to pour your personal and business profits back into your company. Yes, you want to reinvest and grow your business, but you shouldn’t put all your money in one place. Businesses can be affected by economic downturns, market changes, and other factors. While you should invest in innovation and technologies that will provide you with competitive advantages, invest some of your money in other assets as well. A diversified portfolio will ultimately protect you and your company.
Create a Strategic Tax Plan
You will be responsible for filing both personal and business taxes. Your tax liability will vary depending on the type of business you own. For example, sole proprietorships, LLCs and partnerships are taxed on a pass-through level, where your company profits are passed through to your personal taxes. However, you can opt for S-corp taxation on some businesses, which allows you to include Section 179 deductions in your taxes. Carefully plan your tax strategy to reduce your taxes as much as possible.
Purchase Adequate Insurance
You need both personal and business insurance to negate or mitigate your personal and business risks. For example, disability and life insurance protect you and your heirs in case something happens to you personally. Business insurance can protect you from lawsuits brought against your company, natural disasters that cause property damage and other risks. Make sure you are prepared and protected.
As you start creating your personal and business financial goals and plans, consider working with a reputable financial planner.
