According to the U.S. Small Business Administration Office of Advocacy, there are over 33 million small businesses throughout the country. Furthermore, 8 out of 10 of these small businesses have no employees (besides the business owner). This means millions of self-employed small business owners throughout the country must plan and manage their business finances. Many business owners work with a financial manager or advisor to plan and manage their finances. However, there are a few principles of wealth planning for small business owners that you can begin to implement yourself even before consulting with a qualified professional.
It takes money to start, run, and maintain a healthy business. Particularly in the early years, a business may not make enough profit to sustain itself or promote future growth. Outside of generated profits, there are various avenues of funding you can explore to find the right option for you and your business.
Small Business Loans
There are multiple ways for business owners to take out loans to start or grow their businesses. You may be eligible to take out a small business loan from the government or a financial institution (such as a credit union or bank). Each of these loans will have varying interest rates and terms of payment.
Investors may be willing to supply venture capital for your business if you prepare a thorough business plan and go through a due diligence review. Be sure that both you and your investors are clear on the terms and conditions of the investment. Before accepting venture capital, it is important to note that, after investing in your company, the investor will be closely involved in your business.
Crowdfunding is a way of raising funds from various contributors known as crowd funders. Although the role of a crowd funder is similar to that of an investor, they typically are not given a share in the company and do not need to be repaid. Many businesses offer a gift, discount, or perk in exchange for donations to incentivize crowd funders. This form of investment is a low-risk option for businesses that do not require large amounts to be invested quickly.
Finally, you can always fund your business through your savings account or 401(k). Like other forms of funding, there may be risks in depleting your savings to fund your business. However, this option does not require you to repay loans or split ownership of your business.
In both business and personal life, unexpected events can occur. For instance, there may be instances of inventory damage or legal problems. Luckily, business owners can opt for different insurance policies to reduce the potential risk significantly.
While you may choose to carry a personal life insurance policy, business owners may benefit from the additional coverage of a life insurance policy for their business. The key difference between these policies is that a personal life insurance policy protects your family in the event of your death, while a business life insurance policy ensures the continuation of your business.
Disability insurance exists to ensure workers who become disabled through injury or illness can receive a portion of their salary if they are unable to work. In most cases, you would receive disability benefits from your employer; however, as a self-employed business owner, it is important to take out a policy for yourself in case injury or illness occur.
Workers Compensation Insurance
In almost every state, business owners must carry workers’ compensation insurance policies to protect both themselves and their workers in the event of a workplace injury. These policies will provide coverage for workers’ healthcare and lost wages.
Wherever your business is conducted, it is important that you properly insure the premises. If you are the owner of the building, it is crucial to protect this significant asset. If you are a tenant in an office or workspace, carrying a rental insurance policy that covers the property is crucial in the event of natural disasters such as fires or floods.
Many businesses require the use of heavy, expensive machinery. In an office environment, technology such as laptops, copiers, and printers can make up a significant portion of a business’ budget. An equipment insurance policy will ensure that you are covered if your business equipment is damaged or stolen.
Commercial Auto Insurance
Similarly to equipment insurance, commercial vehicles can be covered by a commercial auto insurance policy. Many businesses require the use of commercial vehicles for the transport of both people and goods. If you and your employee are at fault for an accident while driving a commercial vehicle, commercial auto insurance will ensure you won’t have to pay for vehicle damage or accident injuries out of pocket.
No matter how big your business is or where it is located, it is likely you have important assets that you have invested in that are crucial to the operation of your business. In the event there is a break-in on your property, or your inventory is stolen, a crime insurance policy can help you recover some or all of the cost of your lost assets.
Not all insurance policies will make sense for every business owner. However, many insurance policies are a positive form of risk management that may greatly benefit business owners. Carefully consider the needs of your business and any associated risks you may incur to make sure you are adequately covered.
Establish Financial Goals
In any venture in life, establishing clear goals can be incredibly productive. In business, it is important to regularly articulate your financial goals in order to grow in a positive direction. Every business owner will have their own unique goals that best fit their business, but the following examples are an excellent place to begin.
Diversify income streams
As most business owners have found out, the market can be extremely unpredictable. A flexible business with various income streams, however, can withstand a changing market. Opening up new revenue streams for your business can help to protect your business during market fluctuations and boost profits in the long term.
Reduce business debt
In some situations, incurring debt may be a necessary measure to keep a business running through a rough patch. However, unpaid debt can weigh a small business down with growing interest and monthly payments. Doing what you can to proactively reduce debt will help free up space in your budget.
Are there hidden, extraneous expenditures you’ve incurred in the running of your business? It is important to periodically review all business expenditures and evaluate whether any can be reduced or eliminated.
Invest in marketing
Small business owners can tend to overlook the importance of marketing when looking at the bottom line. Nevertheless, it is a fact that if you do not utilize effective marketing, your full potential customer base may not be reached. Work with a marketing professional who understands your brand, services, products, mission, and goals.
Separation of personal and business
Lastly, keeping appropriate boundaries between the personal and professional is always important. Many small business owners operate most of their operations from home and may be the sole employee. Therefore, it is their responsibility to ensure that revenue, resources, and time assigned to the company are separated from personal matters.
Taxes are a necessary cost of running any business. Depending on your location, you may pay taxes at the federal, state, or local level. The following examples are the most common examples of tax considerations for small business owners; however, your business may involve other forms of taxation not listed here. Many business owners find it beneficial to consult with a qualified tax professional to ensure they are paying all taxes accurately and on time.
Small business owners are responsible for paying a tax on their income. This tax is usually calculated together with the self-employment tax. However, this tax only applies if you live in a state that collects tax on income.
The FICA tax (Federal Insurance Contributions Act) includes both Social Security and Medicare taxes. When you are self-employed, you are responsible for paying both of these taxes yourself.
A payroll tax is paid on all employee salaries within a given company. Employers are responsible for calculating and paying their portion of this tax as well as reporting quarterly using Form 941.
A sales tax is calculated based on a percentage of the sale of goods and services. In most cases, the consumer, not the business owner, is responsible for paying this tax at the point of sale.
Capital Gains Taxes
Capital gains taxes are levied on profits generated from the sale of non-inventory assets. For example, if you sell business assets and make a profit, you are required to pay a capital gains tax. Similarly, capital gains taxes will apply to appreciating business investments.
A use tax is a specific type of sales tax levied on goods purchased out of state without paying a sales tax. For example, if you buy goods from another state that will be sold or stored in a state that does require a sales tax, this difference will be made by paying a use tax on these goods. In most cases, the use tax you will pay will be the same rate as a general sales tax.
Any real property owned by your business will result in property taxes. If your business involves multiple franchises or locations, your property taxes will increase correspondingly. If your business involves real property in multiple counties or states, be sure that you are up to date on all applicable tax laws.
Business owners should be prepared to pay all applicable taxes. However, small business owners may qualify for various tax credits and deductions. To be eligible for a small business tax deduction, you must prove that the expense you write off is ordinary and necessary. Keep careful documentation of purchases and charges to make sure you get the deductions you are eligible to receive.
Without quality employees, no business can truly succeed. Businesses that offer quality, competitive employee benefits are more likely to attract and maintain quality staff. When you begin financial planning for your business, it is crucial to take into account the costs of employee benefits.
Depending on the business, benefits offered to employees may vary. Employee benefits can be either organizational or consumer oriented. Common employee benefits include health insurance, paid time off, and retirement payments. However, business owners may also offer benefits that set them apart from competitors, including paid family leave, quality vision and dental insurance, tuition rebates, and professional development.
The more your business expands, the more employees you will hire. With more employees comes higher expenditure on employee benefits. As you continue to grow your staff, you must factor in the costs of these benefits in addition to the profits new hires will bring.
Long Term Succession Planning
It takes passion and years of your life to build a successful business. It is important to begin planning for the future of your business in the event of retirement, disability, or death to honor the work you’ve put in. While no one can predict the future, it is inevitable that, at some point, you will no longer have direct involvement in your business operations. To avoid any uncertainty regarding succession, clearly defining and articulating your plans is important.
There are many actions business owners can take to begin planning the succession of their business. The first is to decide on your successor. For many small business owners, their successor is an immediate family member. In this case, succession planning can be accomplished simultaneously with estate planning. However, you may also choose to leave your business to an employee or other business associate. Whoever you choose, you must be confident in their interest in and aptitude for leading your business.
One thing to consider, however, is the potential tax burden on your chosen successor. If you do not make arrangements, the tax burden may be prohibitively expensive and could result in your successor selling the business. With the help of a financial advisor, you can make arrangements now to ease the transfer of ownership.
Hire a Financial Advisor
A financial advisor can provide many beneficial services for business owners, the most important of which is financial planning and management. Wherever you are in your business, a financial advisor can help you take stock of your options and plan for future growth. Even if you do not believe you are currently in need of advising, there could be potential financial issues regarding your business that only a professional may notice.
An effective financial advisor has the knowledge, skill, and experience to provide quality financial advice. Therefore, business owners should only consult with experienced professionals. Expertise.com offers a free-to-use directory to connect business owners with top-ranked financial advisors in their area.
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