Owning a small business takes confidence, determination and a willingness to take on many roles. One of the most challenging of those roles is managing the business’s finances, as most owners don’t have a background in finance, and their priority — understandably — is running the business and taking care of customers.
It can often feel like a balancing act, as owners stretch themselves to strategize, organize and execute their business model while also keeping an eye on the future. Unfortunately, it’s common for business owners to find themselves in financial situations that hinder success, from cash flow and debt issues in the short term to strategizing a solid retirement plan in the long term.
With all the time, passion and effort invested in the business, often alongside family members and close personal connections, it’s essential for owners to understand the financial considerations they’ll inevitably face along the way and how to avoid making costly missteps. Here are six common small business money mistakes to avoid:
#1 – Premature lifestyle changes and unnecessary purchases.
When getting to a stage of being cash-flow positive, owners often feel a sense of relief. Continued success then leads to confidence in looking beyond covering overhead costs to making a few well-earned lifestyle upgrades. Should they buy a new home? Purchase that new car? The issue here isn’t in the reward but rather in the timing. Especially in our 40s and 50s, it’s critical to be thoughtful about making any lifestyle changes that may not be sustainable, especially without mapping out a clear vision of the future.
#2 – Underestimating tax requirements over time.
Taxes are a way of life and business, and owners in the start-up phase often overlook the importance of hiring a professional to manage their taxes. With tax laws and regulations constantly changing, it can be extremely difficult for a business owner to stay up to date on requirements. Every business is also unique in its liability based on its size, location, type, etc. Your business plan’s financial projections can help you estimate your tax liability, and a good rule of thumb is to pay quarterly taxes on your income. Another wrinkle to consider is your movement between tax brackets in your working and non-working years.
#3 – Not sticking to and evolving your budget.
This one is fairly straightforward, but you’d be surprised how many business owners don’t follow their budget, fail to update their budget or don’t have a budget at all. Without a solid budget, it’s difficult to plan for future tax requirements, insurance and even potential emergencies. Not having a budget may also lead to taking on unnecessary debt that can be detrimental to your success. By adhering to a structured budget, an owner can pivot quickly to minimize expenses when needed (for instance, during the worst of the 2020-21 pandemic that impacted many small businesses) and feel confident in making necessary large purchases that benefit the company.
#4 – Mixing business and personal finances.
This one also seems very obvious, but as a small business owner who manages everything day to day in both their personal and professional life, it can be easy to blur the lines at times for the sake of convenience. However, failing to keep business and personal expenses separate makes it very difficult to keep track of how much money the business is actually spending or making. Over time, this lack of boundaries can lead to cash flow issues balancing accounts, estimating appropriate taxes and calculating profits — and it can even impact your ability to get a business loan.
#5 – Overlooking your employer-based retirement plan.
One of the most attractive benefits a business can offer its employees is a solid retirement plan. Without spending the appropriate time understanding your options and the tax implications of your plan, you might unknowingly be short-changing your people and doing the business a disservice. Should you choose a simplified employee pension (SEP) IRA, SIMPLE IRA or 401(k) offering? Can the business afford to match employee contributions? If so, at what percentage? Keep in mind tax diversification strategies for your employees too (pre- or post-tax). Allowing employees to contribute to either a traditional or Roth retirement plan gives them options and can help your benefits package stand out from competitors.
#6 – Sleeping on a succession plan.
With many owners focused on the here and now, it can be difficult to find time to plan ahead for retirement and selling the business, especially when that timeline is potentially far into the future. It’s important to start succession planning years in advance, however, and it starts with a discussion that balances your personal goals with what carries value for your business. What are you hoping to achieve in five, 10 and 15 years that would make you look back at your business proudly? What’s the most important thing for you to get out of selling your business down the road beyond the money? With that mindset, you can then assess how to make small changes to your business early on that could add more value in the future. Maybe it’s key hires, streamlined processes or technology upgrades. Bigger considerations might be location changes or advertising investments. You can operate in the present with the perspective of always asking “How’s this adding value?” or “Does this outcome align with my specific goals for the future of my business?”
While every business owner has a unique set of circumstances and experiences, awareness of these common mistakes, as well as partnering with professionals who specialize in managing finances, is key to staying on track for a bright future.
At Creative Planning we offer a variety of services, such as outsourced accounting and comprehensive wealth management, to help business owners navigate their personal and professional finances. Want to learn more about what we can do for your business? Contact us today and one of our team members will be happy to discuss our services further.
