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Tips for Small Business Owners

Tips for Small Business Owners

Small business is vital to the U.S. economy, it employs half of the private-sector workers and creates two-thirds of net new jobs, according to federal data. As of 2018, there are 30.2 million small businesses in the U.S (99.9% of United States businesses):

  • Small businesses employ 57 million people in the U.S.
  • 66% of small businesses will outsource services to other small businesses
  • 53% of small business owners rank their happiness level at 9 or above (scale of 1 to 10)

The biggest challenges of running a small business, according to small business owners - Economic uncertainty, the cost of health insurance benefits, and a decline in customer spending, with regulatory burdens almost tying for that third-place spot.

Small business owners are heavily involved in their day-to-day business operations, filling their order book, customer service, cost control, cash-flow management, and driving the bottom-line. Owners of small businesses have much the same concerns as everyone else, except their personal lives and their business, are intertwined. They are responsible for the whole business, keeping the doors open, and have no idea about a 40-hour week. They are personally responsible for the fortunes of their enterprise.

This is the reality of the small business owner and all the more reason why small business owners should conduct at least an annual assessment of their business and personal finances. Here are some tips to follow in weighing your small business financial plan:

Cash Flow Budget & Saving.

Have in place a reliable and routine practice that monitors your cash flow needs in the short-term. Understanding where your cash went is important, but reliable cashflow forecasting is valuable intellectual property.

We all know the miracle of compounding, and we also know that there is only one number that does not experience this miracle – ZERO. Save something, do not think any amount is too small. Advisors suggest saving at least 10% of your income on an annual basis. However, each of us has a savings goal, and we need to assess these goals and confirm you are on track to achieve them.

Your Retirement Plans and Safe Harbor 401(k) plans.

Business owners should work with their financial advisor to determine the most appropriate savings vehicle for them. Individual retirement plans include 401(k)’s, individual or solo 401(k)’s, individual retirement accounts, Simplified Employee Pension (SEP) IRAs, Roth IRAs, defined benefit and defined contribution plans. These vehicles will not only help achieve your retirement savings goal but will also help to minimize current year taxes. If you have savings in taxable accounts, then a tax-efficient strategy is needed to maximize your after-tax return.

Many small business owners with employees are able to minimize regulatory issues and provide for their workers a Safe Harbor 401(k) plan[1]. These are especially great for small businesses since fewer employees make it difficult to pass regulatory testing. The deadline to set up a new Safe Harbor 401(k) plan is October 1, of any given year. Any plans that start after that are not eligible for Safe Harbor status.  As a small business, starting your plan as Safe Harbor on the first day of the following year is a great way to have a clean benefit offered for the full year to employees, with minimal compliance headaches.

Create/Review Estate Planning Documents.

It is important to create wills, living wills, medical and financial power of attorney documents. These documents should be reviewed when a significant life event occurs or at least every two to three years to ensure they reflect your particular circumstances, goals and also consider any changes in regulations.

Insurances – Life, Disability and Business Insurance.

Let me start by stating at the outset that I do not sell insurance products or receive commissions on insurance product sales.

Various types of life insurance are available. They provide a death benefit when the owner of the policy passes away. It is important to review your policies at least every couple of years to ensure the coverage is adequate to protect your loved ones. Also, financial situations may change, and you may no longer need the full amount or type of coverage you own. Similarly, if you have a business partner you each may want a life policy on each other so in the event of untimely death you can buy your partner’s share from their heirs, as owning a business with them may not be ideal.

Statistically, you have a greater chance of premature disability than premature death. Therefore, it is also important to evaluate coverage needs to provide for you and your dependents if you are not able to work. As a business owner, it is important to own insurance that will allow your company to run if you are unable to actively participate in its daily operations. This insurance may be used to cover the cost of a person to substitute for you, or to replace the income from your business if the company no longer exists.

Education Planning:

Much like health care costs, college education expenses have increased well beyond average inflation levels throughout the past decade. Several college savings vehicles are available to provide tax advantages and an array of investment options for college savings. These savings plans require an annual review of performance and expense levels.

Tax Planning. 

Annually and about now, you should meet with your accountant to discuss tax-planning strategies. Tax laws frequently change and there may be changes to your business that could affect your taxes both at the business and individual level. In particular you will want to attend to matters that need addressing prior to December 31, for example, a solo 401(k) will need to be established prior to this date, but contributions can be made as late as October 15 of the following year, also you will have an idea of your taxable income for the year and how year-end billing and expenses impact this, especially if you are reporting on a cash basis.

Investment Allocation.

Review your entire investment portfolio to ensure it is allocated to meet your current and future goals. As your goals and needs change, your portfolio allocation should be adjusted accordingly. This is a time to rebalance your portfolio to ensure it is maintained at your desired risk level. Also, you may wish to harvest tax losses (realized) at this time and be sure to avoid any cash drag (over-invested in cash), your financial advisor is most valuable to here.

Exit and Transition Plan

Succession and exiting your business are an important consideration. To have a clear idea of what your exit options are can be a strategic advantage as some alternatives are ideally planned for in advance to maximize your return. Also, when you have your options in mind you will recognize events or circumstances that could be to your advantage and seize the opportunity. Also, do not underestimate the challenge of transitioning from full-time business management, this also needs consideration and careful planning.

“The more options you have in place for crossing bridges before you come to them, the less looking you need to do before you leap.” [2]

Next Step 

I recommend you meet with your financial advisor and use these items as discuss topics, your advisor should have for and tailored items to consider.   If you do not have a financial advisor or have some questions, please feel free to contact me for a one-hour no-obligation consultation This email address is being protected from spambots. You need JavaScript enabled to view it..


[1] A Safe Harbor plan is a special kind of 401(k) that is exempt from nondiscrimination testing. It has certain built-in elements that help all employees save by requiring companies to contribute to their employees’ 401(k). When employers take this step to encourage more employees to participate, the IRS offers them a “safe harbor” from both the nondiscrimination testing process and the consequences of failure.

[2] The Flaw of Averages, Sam L. Savage, pg. 366

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