According to the Bureau of Labor Statistics, for the 10 years ending March 2018 21% of businesses failed in their first year, 49% failed in their first 5 years, and 66% failed in their first 10 years.1 This means that only 34% of small business owners prepared well enough to survive over the long term.
So let’s suppose you are one of the few that have made it beyond 5 years. At this point your business is profitable, you have a better outlook on your fixed costs, you’ve likely hired a few employees, and you’re (finally) starting to pay yourself a decent income. Now that you feel all of your ducks are in a row and you aren’t running scared, you start mapping out a plan to maintain your customer base as you expand. Here’s the question…
During these first five years, did you ever focus on your personal financial well-being, or were you like most small business owners—you never felt like you had enough money, let alone time, to even think about it?
If you answered like most small business owners, you’re not alone. This is a common theme among many small business owners, even those who have been extraordinarily successful. Too often their time and talent is focused so intently on growing their business that they neglect their own personal financial planning. As a result, they experience success within the business but become prone to making mistakes that hinder their financial future.
Here are some of the most common mistakes small business owners make and what you can do to address them.
They do not establish a business disruption plan.
Unfortunately, many small business owners are the sole “key” to the success of the business. If something were to happen that keeps the owner from working for an extended period of time, there is nothing in place to help cover overhead expenses such as utilities, rents, employee salaries, equipment, insurance premiums, or hiring additional help during this time.
This is where having Business Overhead Expense insurance and Key Person Disability insurance can prevent your business from failing. These types of insurance policies pay benefits to your business to keep things running while you are unable to work. It’s also important to consider who you would like to step in to temporarily fill your role.
They do not provide protection for their families should an unexpected disability or death occur.
Have you considered how long your personal savings would carry you if you became disabled? Your personal expenses won’t stop just because you’re unable to work. Having a disability insurance policy in place makes sure you and your family are cared for while you’re out of the workforce.
What happens if you pass away unexpectedly? Is your thought that your family would be able to sell your business to successfully provide for their future? Many business owners feel this way. However, have you considered that your business may be worth far less without you there? It’s important to have the right type and amount of life insurance to provide the best outcome for your family.
They do not consider the value of adding benefits plans.
As your business is getting started, you are often running lean and adding benefits for you and your employees may be cost-prohibitive. However, as your business grows, it is important to add benefits such as health insurance, disability insurance, life insurance, and retirement plans early on. These benefits will not only help you retain employees, but they will often allow you to save on costs and reduce your tax liability.
Flex spending accounts (FSAs) and Health Savings Accounts (HSAs) allow you to pay for medical expenses more efficiently, and implementing the right retirement plan allows you to maximize your retirement savings while accounting for variations in cash flow. Not only can you maximize your savings with the right retirement plan, but you can also drastically reduce your income tax liability.
They do not set aside savings outside of their business for future goals.
As you are pouring money into your business so it can grow and prosper, are you neglecting to save for your own financial future? Many business owners enjoy a very comfortable lifestyle while the business is successful and assume that once they are ready to retire they can sell the business and live on the proceeds. They use this as motivation to continue to put money back into the business. However, doing so may lead to heartache should the business suffer a setback or fail altogether.
It’s important to balance personal savings with capital reinvestment. By considering your personal goals alongside the goals of the company, you can be proactive in drawing funds from the business when it’s profitable and directing those funds towards your personal goals.
They do not consider their business as part of a diversified investment portfolio.
Similar to the previous mistake, looking at your business as your sole means of wealth is dangerous. As the adage goes, “don’t put all of your eggs in one basket.” You should consider your business an investment just as you would an investment in stocks, bonds, mutual funds, and other investment vehicles.
While you may have more control over your business, you cannot control outside events that might have a significant impact on it any more than the next business. By diversifying your portfolio, you greatly reduce the risk of losing everything and not being able to retire.
They do not develop an exit strategy or succession plan.
As many business owners get close to retirement, they begin to think about what they are going to do with their business. They have spent much of their lives building their business into a successful enterprise. They have nurtured it, pruned it, and poured their blood, sweat, and tears into it. Now, they are not sure how to let it go. Many times, this realization comes at a time when they “need to” retire rather than being something they’ve planned for. At that point, there is often less control over the outcome which could result in not being able to provide the retirement income they were counting on.
Instead of waiting until there is an urgency to figure out how to part from the company, you should put a plan in place now. Decide whether you want to sell to a child, employee, competitor, or someone outside the industry. Develop a plan you feel comfortable with and make sure you have a clear vision for your life beyond the business. You’ll be glad you did.
If you find yourself neglecting your own personal financial planning, like many business owners do, stop for a moment and decide you are going to be successful—not just in your business, but with your personal finances as well.
Consider partnering with a fiduciary financial planner to help you evaluate your options. A knowledgeable planner will help you choose appropriate workplace benefits and analyze retirement plan options that align with both your personal savings goal and your business’s cash flow. He will also work with you to create a 360° view of your finances so you always know where you stand.
If your life currently revolves around your business and you want to alleviate some of the chaos, contact us today. When your circumstances are most chaotic, that’s when good guidance can have the most impact.