4 Key Ways Small Businesses Owners Can Plan for Their Financial Future
Do you have your affairs in order?
- August 7, 2020
- 4 min read
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Upon making the decision to become your own boss and start a small business, you are inevitably going to be taking on more challenges and responsibilities by becoming the main decision-maker of both your business’ future and the future of your personal finances.
Having a solid financial plan can help you adjust to the changes that arise from being a small business owner. To get you started, here are four crucial components to include in your financial plan to ensure long-term success as a small business owner.
Preparing for tax time can be one of the biggest challenges for small business owners. One of the best ways to streamline this process is to ensure that you have a system in place to keep a separation between your business and personal finances throughout the year. By separating your finances, you create structure in your business and can avoid a headache come tax time.
Another way to help with tax preparation is to use technology to organize your business finances. For example, using spreadsheets to track your expenses or software to digitize your receipts can make the process a bit less daunting at tax time. It’s easier to do a little work each week so that filing taxes is a breeze when the time comes than it is to do all that work at the last minute when the pressure is on.
As a business owner, it is important to keep track of deadlines and ensure that you are on track with the IRS’ tax calendar throughout the year to avoid any delays or penalties associated with filing late or incorrectly.
One of the biggest issues facing small business owners is determining the best ways to mitigate various types of risk. While owning a business comes with a level of risks in itself, there are threats in both your business and personal life that can be protected by setting up some safeguards. A critical step in risk mitigation is to secure the proper insurance policies to provide enough protection that your business wouldn’t face financial devastation in an unforeseen event.
For example, obtaining a private life insurance policy is beneficial because it transfers your financial risk of passing away unexpectedly to the insurance company in exchange for a set monthly premium. This is particularly important to have if your family needs your income to live on or if you relied on family assets for the business. In the early stages, securing a small term life insurance policy to cover your family’s basic needs can help you better financially plan for the future. Remember, as your business starts to grow you can always adjust as needed.
But that’s not the only type of insurance you need to consider. Depending on the nature of your business, you may need to invest in additional forms of insurance, especially if the work you’re doing opens you up to lawsuits. You may need to consider general liability insurance, professional liability insurance and employee insurance, among others. Which type of how much of each type of insurance will need to be customized to the needs of your business.
When the business solely depends on you, estate planning is particularly important. If you were to pass away, it is crucial to have a plan set in place to protect both your personal finances as well as your business’. Depending on the type of business, there are certain protections you can put in place to ensure that your business can continue and that your family isn’t subjected to a long and difficult probate process.
While obtaining a will is one of the most common legal items to set up to protect your estate, there are other provisions available to help protect your business. At the very least, a will is beneficial to have because it allows you to specifically designate where your assets go if you were to pass away. If you are a sole proprietor, a will is especially important because it allows you to separate your business assets from your personal assets.
Furthermore, consider looking into a living trust which allows you to set up your business as a completely separate entity, giving you specific control over what happens to your business’ assets. You could also look into succession planning, which can help you to legally determine the future of your business and how it would be passed on if you were to retire, become disabled, or pass away.
While there are plenty of advantages to being your own boss, one overlooked benefit that comes with working for someone else in the traditional workplace is that retirement planning is usually set up for you as part of your benefits package. As a small business owner, however, retirement planning is your responsibility so it is important not to forget this step when coming up with a financial plan. While you may not have access to a traditional 401(k) the way you would with an office job, you can pursue and IRA and a solo-401(k).
Research the different types of retirement plans that you can secure to determine the best option for your needs because the earlier you start planning for retirement, the more options you will have when determining your exit strategy.
Being a small business owner is one of the most rewarding career paths you can take. Not only are you leveraging your specific skill set, but you have more control and flexibility than you would have in the traditional workplace. With this autonomy, however, comes more responsibilities to determine the best course of action for both your personal and professional needs. However, with a designated financial plan in place, you will be able to reap the benefits of a long-term successful business model.
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