The following article originally appeared in the Pacific Coast Business Times on July 3rd, 2013.
Planning Your Finances
By Kevin Bourke
Wednesday, July 3rd, 2013
“It feels like I’m playing ‘whack a mole.’ As soon as I put out one fire, another pops up. Financial planning? Who has time?” Indeed, running a small business is a monumental task.
With that in mind, here are five quick, but important, tips that may help you pursue your overall financial goals:
- Beware the adage, “invest in what you know.” While there is some wisdom in this, it can serve as a double edged sword for a business owner. Why? If your business makes widgets, you’re probably a widget expert. In fact, you can probably look around at all the widget producers, see the direction that widgets are going and feel confident that you can invest in the widget industry with some success. Makes sense, right? You may want to think twice. What would happen if a widget replacement was invented that was better and faster than current widget technology? If both your business and your investments are in widgets, you’ve broken the cardinal rule, “Don’t put all your eggs in one basket.” Remember to diversify. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
- Build a cash cushion. Running out of money can do more than just wreck your company, it can prevent you from putting food on the table. Start as soon as possible to build cash. Three months’ worth of expenses in cash is a good small start, six months is better, a year or more is great. This also means that you, as a business owner, need to live below your means. Nearly impossible for those of us trained from birth to consume, but all important.
- Don’t rely solely on the sale of your business to fund your retirement. A solid company sponsored retirement plan has both the benefit of allowing you to prepare for your own retirement and the added value of assisting you to attract and retain good employees. It may also serve somewhat as a safeguard should the unexpected happen.
- Get familiar with debt. There are many places to borrow, ranging from friends and family to banks and beyond. What are the tax consequences of each? What happens if you can’t pay the loans back? Should you sign personally or as a business entity? How much debt is prudent? Educate yourself on debt.
- Taxation. Tax planning deserves careful, year round, thought. Recognize that many decisions have unintended consequences. For example, you may choose one type of business entity over another for its tax structure, but lose flexibility in something important to you, such as succession planning. Some business owners allow tax planning to dominate every decision they make, which I wouldn’t recommend. Rather, allow your tax decisions to complement your overall goals. Experience suggests that a good tax advisor is worth every penny.
If you’ve been procrastinating, there is no time like the present to get started. Don’t let another day, week, year, or decade pass.