Eleven ways to boost and protect your wealth
Small and mid-size business are the backbone of the US economy. Entrepreneurship and creativity have been moving the American economy for centuries. In fact, US has one of the best grooming environments for start-ups and small businesses. Many flagship consumer brands like McDonald’s, Starbucks, and Apple started very small with one restaurant, a coffee shop, and a garage workshop to become international leaders in their industry.
Business owners spend several years building up their business. They invest a significant amount of personal time and capital to grow their companies. Almost always these entrepreneurs will have their family fortune locked in their business. Those who succeed can go public or pass their wealth to the next generation.
Entrepreneurs are a special breed. Many have a vision or a single idea that that drives their pursuit for success. Others have a unique skill or talent that make them stand out from their competitors. They are independent, self-driven and bold.
Focused on their business, more often than not entrepreneurs ignore or delay their personal financial planning. In this post, I would like to discuss several practical steps that business owners can follow to establish their successful financial plan.
Balance your business and personal goals
The first and most crucial step in the personal financial planning process is setting your short and long-term financial goals. In many cases, the business goals can interfere and clash over personal financial goals. Business goals to expand into a new market or purchase a new factory can negatively interfere with your personal goals such as saving for retirement or college education for your children. Striking the right balance between your business and personal goals is key to achieving them. Prioritizing one over the other may hurt your long-term financial success.
Explore different financing alternatives
Every new business idea requires capital to start. The success of the venture depends on the owner’s ability to secure financing. Sometimes, the funding comes from personal savings or the sale of a property. Other times, the owner needs to look for external funding within his or her social circle or even approach a financial institution. The external financing can be in the form of a loan or equity stake.
Both debt and equity financing come with embedded costs. The cost can vary depending on the company’s size, industry, history, economic conditions, etc. One of the main advantages of debt financing is that the interest on the loan is tax deductible. One the other hand equity financing may allow for more flexibility.
Another great way of financing your idea is your customers. Indeed, your clients are one of the best and inexpensive sources of financing. If your customers love your product, they will be willing to give you an advance payment, subscribe to your platform or consider a product/service exchange.
In any case, the entrepreneurs should seek to minimize the overall cost of capital of its business by exploring multiple financing channels.
Even the best idea can fail if it doesn’t generate profit. In simple numerical terms, the company revenue should be higher than its expenses. Many ventures do not succeed because the company cannot generate enough revenue to cover all costs. Clearly, the first answer will be to generate more revenue. However, many successful companies are notorious with their focus on cost control. Business owners must stay on top of their expenses. They must track and analyze your cost. Owners should look for operational deficiencies and overlaps, result-based compensation, economies of scale and ways to increase productivity.
Businesses need cash to maintain healthy growth. Not surprisingly, the prominent investor Warrant Buffet prefers to invest in companies generating significant cash flows. The capacity to produce cash from its operations will determine the company’s ability to pay its employees, creditors, and vendors. Building a disciplined system of managing receivables and payables and maintaining a cash buffer for emergencies are keys for effective cash flow management.
Manage your taxes
Filing and paying taxes is a long and painful process. Tax law is very complex. Many hidden threats can trigger tax events for you. There are also many opportunities to save on taxes. Often, your tax bill depends on your company legal status. Sole proprietors have different taxation rule from c-corporation. Speak to an accountant or tax lawyer to find out what legal status works best for you. To avoid missed opportunities and last-minute mistakes, you have to prepare for the filing process in advance. Start early. Keep a clean record of all your expenses. Track all tax filing dates. Remember to pay all federal and state taxes, social security, Medicare, local permits, and fees. Consider using a professional bookkeeping software and working with a CPA.
Risk comes in all shapes and forms – business risk, operational risk, financial risk, disability risk and so on. Managing the risk from different sources is a mandatory skill for any successful business owner and executive. External threats can impose significant obstacles to profitability and expansion but if managed successfully can create substantial opportunities for long-term growth.
Business threats can come from new competitors, new technology, changes in consumer demand, new regulatory requirements and so on. Business owners have to be on top of these changes and often even drive the change.
Operational risk impacts the companies’ ability to serve its customers.
Financial risk can come from interest rates, volatile stock markets, and liquidity crunches. Macroeconomic factors can affect your clients’ ability to pay off their debt. Having a solid financial strategy, building buffers and managing cash will allow the business to withstand unexpected financial turbulence.
Short-term and long-term disability will prohibit the owners and key employees to perform their duties. Injuries and sickness of key personnel can significantly hurt any business. Prolonged disability can limit owners’ ability to make a living, support their families and grow their business. Having disability insurance can help bridge the financial gap during a time of recovery. Moreover, having a disaster plan can save your business at times of emergencies and unforeseen circumstances.
Establish a retirement plan
Having a company retirement plan is an excellent way to save money in the long run. A pension plan contributions could reduce current taxes and boost employee’s loyalty.
While there are few alternatives – 401k, SEP IRA, and SIMPLE IRA. I am a big supporter of 401k plans. Although they are little more expensive to establish and run, they provide the highest contribution allowance over all other options.
The maximum employee contribution for 2016 is $18,000. The employer can match up to $35,000 for a total of $53,000. Individuals over 50 can add a catch-up contribution of $6,000 for a total of $59,000 annual contribution.
Self-employed individuals can also take advantage of this option by setting up a solo 401k plan. Moreover, they can contribute up to $53,000, $18,000 as an employee of your company and $35,000 as an employer.
Build a safety net
Creating a safety net is a critical step to protecting your wealth. Many business owners hold a substantial amount of their assets tied up to their personal business. By doing it, they expose themselves to a concentrated risk in one company or industry. Any economic developments that can adversely impact that particular sector can also hurt their personal wealth.
The best way to build a strong safety net is asset diversification. Owners can significantly decrease the overall risk of their portfolio when investing in a broad and uncorrelated range of assets, sectors, and regions.
Start your estate planning
Estate planning is the process of arranging the disposal of your assets after your passing. It further involves your family members, other individuals, and charitable organizations. Estate planning starts with setting up a family trust and personal will and can also affect financial, tax, medical and business planning. Additionally, you can use estate planning to eliminate uncertainties over the administration of a probate and to maximize the value of the estate by reducing taxes and other expenses. The ultimate goal of estate planning can be determined by your specific goals and may be as simple or complex as your needs dictate.
Plan for business succession
A successful business can impact various parties such as owners, employees, contractors, vendors, clients, landlords, and suppliers. Therefore, creating a business succession plan will ensure that all parties interests are met in the event you decide to discontinue your business or pass it to another person. Moreover, a robust plan will address numerous tax and financial issues which will result from the succession. The complexity of the succession plan will depend on the size, industry and legal status of your business.
About the author: Stoyan Panayotov, CFA is a fee-only financial advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary investment management and financial planning services to busy families and business owners.