Running a small business involves juggling multiple responsibilities, and managing the business’s finances is one of the most crucial aspects. Proper financial management can be the difference between a thriving business and one that struggles to stay afloat. Here are seven essential financial tips for small business owners to help ensure long-term success.
1. Maintain Accurate Financial Records
It’s important to have accurate, GAAP-aligned financial statements that clearly reflect how the business performs. Be sure to keep personal expenses separate, categorize revenue and costs consistently, and track key performance indicators and margins over time. As you grow, your business will become more complex and you’ll want to have a clear understanding of your key revenue streams and expenses—whether those are ongoing expenses or one-time occurrences. This will help you create annual goals for growth and profit, which will allow you to communicate clear performance objectives for your employees.
2. Monitor Cash Flow and Create Recurring Revenue
Cash flow is the lifeblood of any business. It’s crucial to keep a close eye on the money coming in and going out to help ensure you can meet your financial obligations. Ideally, the cash flow is being supported by recurring revenue related to contracts or subscriptions. This helps your financial forecasts be more predictable and generates consistent cash flow. Regularly review financial statements—ideally monthly—to spot trends and potential issues early. Use historical data to forecast future cash flow and prepare for slow periods. Efficiently managing receivables and payables helps ensure timely invoicing and follow-up on overdue payments while negotiating favorable terms with suppliers. And if this becomes an overbearing task, hire a professional bookkeeper to help take care of your statements.
3. Identify and Mitigate Risk
Every business faces risks, whether financial, operational, or market-related. Identifying these risks early and having a plan to mitigate them can help save your business from significant setbacks. Conduct a risk assessment to identify potential risks and their impact on your business. One overlooked risk to small businesses is the loss of key employees. You can help minimize this risk by providing competitive wages and employee benefits. For your most valuable employees, you can develop specific reward packages for them and even purchase life insurance on their lives should they pass away unexpectedly. Develop a risk management plan to implement strategies that help minimize or eliminate risks, and protect your business with appropriate insurance coverage, such as liability, property, and business interruption insurance.
4. Get Help with Tax Planning
Tax planning is often a critical component of financial management. Proper tax planning can save your business money and help ensure compliance with regulations. More importantly, you should be prepared to pay the proper taxes throughout the year.
All taxpayers are required to meet Tax Safe Harbor. Safe Harbor is either 100% of the prior year’s tax—110% for some higher-earning taxpayers—or 90% of the current year’s tax paid within the calendar year. Understand your tax obligations at the local, state, and federal levels, and keep detailed records of income, expenses, and tax-related documents.
5. Plan for Your Retirement
As a small business owner, it’s essential to plan for your retirement independently. Since you are the employer, you have the obligation of choosing the right retirement plan for you and your company. Set up a retirement plan, such as a SEP IRA, Solo 401(k), or SIMPLE IRA, and make consistent contributions to your retirement savings. Not only do these plans help you save for the future, but you are also able to defer taxes to later years. Consulting a financial advisor can help you optimize your retirement plan based on your financial goals.
6. Create Succession and Exit Plans
Having a clear succession or exit plan helps to ensure the continuity of your business in the event of retirement, sale, or unforeseen circumstances. For limited liability companies, this may be part of your operating agreement, and for a partnership, this may already exist in your partnership agreement. A corporation may need to create a separate shareholder or buy-sell agreement to address these concerns. Over time, you should identify potential successors and train them to take over your business. Establish a timeline for your transition or exit, and document the comprehensive succession plan outlining the steps and responsibilities involved.
There are many financial professionals who are well-versed in business exit strategies, the largest of which is helping to minimize the tax burden of selling. There are investment solutions that can help minimize the tax implication while aligning with portfolio goals.
7. Work with a Financial Professional
Managing finances can be complex, and working with a financial professional can provide valuable insights and expertise. Many times, financial professional have relationships with attorneys and CPAs to help get their clients the service and assistance they need. A financial advisor can offer strategic advice on investments, retirement planning, and risk management while quarterbacking your business and personal financial plans. Regularly meet with your financial professional to review your financial status and adjust strategies as needed.
The Bottom Line
Proper financial management is critical for the success and sustainability of a small business. By keeping personal and business financial goals separate, adhering to a comprehensive budget, monitoring cash flow, identifying and mitigating risks, getting help with tax planning, planning for retirement, creating succession and exit plans, and working with financial professionals, small business owners can navigate financial challenges and achieve their long-term goals. Implement these tips to help build a solid financial foundation for your business and ensure its growth and prosperity.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Wealth Services LLC nor any of its representatives may give legal or tax advice.
Tom Fridrich is a Non-registered associate of Cetera Wealth Services LLC, Member FINRA/SIPC”
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