The leaves are changing. The air is crisp. It’s getting dark out earlier. Before we know it, it will be time to wrap gifts and eat turkey with family and friends.
Gearing up for these changes and making plans for the new year makes October the perfect time to evaluate your finances before the holidays’ busyness.
It makes sense, then, that October is officially recognized in the national calendar as National Financial Planning Month.
Here are some ways you can make the most of National Financial Planning Month:
1. Evaluate your business’ financials.
In the past six months, many business owners learned the hard way that sound financial planning is not a luxury. The importance of a solid plan that includes savings cannot be overstated and is critical in an emergency.
If you have not already established a baseline budget based on business history, review your books for the past quarter and/or year. Look at your balance sheet, income statement, cash flow, and owners’ and/or stockholders’ equity.
Know your revenue, expenditures, profit margin, assets, and liabilities. Once you know your numbers, you may find improvement areas, such as a need to decrease spending or increase investing.
Once you have a solid baseline, decide when you will reevaluate these financials. You may choose to review them monthly, quarterly, etc. Some businesses can work better with short-term goals, and others prefer to forecast for the annual year and adjust as needed.
2. Create specific goals.
Business owners need to provide a roadmap for the business and a detailed personal budget for themselves, which often piggybacks on successfully implementing its goals.
Short-term goals like increased revenue, expansion, and entering new markets are important to growing your business.
In the same way, long-term goals are necessary, and they can provide peace of mind and a competitive edge to position the business owner(s) to get top value if the decision is made to sell the business.
A nest egg may take time to put together, but the effort will be rewarded in the long run or the case of an emergency.
When do you plan to retire? Who will take over the business?
Preparing the answers to these questions well ahead of time, also called succession planning, will help make any transition smooth for your managers, staff, customers, and vendors.
An important piece of saving for retirement includes the accumulation of savings. This can be especially challenging for business owners, as some may not always take home a regular paycheck and frequently see their income vary.
Setting a savings goal and coming up with a formula to reach it is essential. This could mean putting away a flat amount or percentage of income regularly. You could evaluate quarterly performance and place a lump sum based on profits in an IRA or 401K. Many solutions allow business owners to save just like an employee on a fixed salary.
A final thought on retirement planning – many business owners create systems to minimize reportable income and social security contributions. While this results in savings in the short run, when that business owner is near retirement, relying on social security as a significant means of financial support will be severely impacted. Consider adjustments that can be made now to contribute additional funds to your retirement accounts to ensure monthly distributions provide a sustainable income in the future.
3. Focus on your budget
Small business owners may want to consider establishing a credit line at their financial institution of choice when they are doing well. In the event of an emergency down the road, it may be more difficult to get these funds approved.
If you are new to the budgeting process, your budget estimate is like estimating for home improvements. The amount you actually need usually ends up being more than what you expected to pay. Therefore, adding a little bit more to your estimate may be a good idea and prove to be beneficial in the long run. The same holds for estimated sales. To make your sales goals, you will likely need to budget for additional customers or set your price slightly higher for your widget or services.
Remember that your budget reflects your values and priorities. Spending time and thought on your financial resources will ultimately get you where you want to go. Cash flow is the primary driver for business continuity. Ensuring a pipeline and even automation for payments can be an extremely beneficial part of a business’s financial plan.
4. Increase your Financial Literacy.
Successful business owners can break down factors that make their business run, including the time it takes to complete tasks, the value of an employee, and the most profitable products and services. They make business decisions based on this information to ensure their focus is on areas that will result in time well spent and resources allocated to maximize profit.
Financial literacy goes beyond the basics, however. Understanding market value and pricing is crucial. An organization that undervalues itself leaves money on the table that could be used to allocate savings or invest in growth. Basic knowledge about tax laws is necessary to ensure that timely payments are made to government agencies to avoid penalties and take advantage of any possible opportunities to reduce tax liabilities.
The good news is you don’t have to go it alone. A CPA or an attorney can evaluate your business entity (LLC, corporation, sole proprietorship, etc.) to determine you are set up to take advantage of the best tax benefits. A third-party payroll provider can help ensure that payroll taxes are remitted timely to avoid penalties. Other professionals who can help include bookkeepers, financial planners, business attorneys, insurance agents, and business coaches. These providers may be beneficial to lean on for advice, development, and implementation of a budget and priorities to help the company and owner achieve success. Everyone brings a unique background to achieve goals, from saving precious tax dollars to cutting expenses, saving for retirement, and planning for growth. If you seek advice from one of these leaders, your local chamber of commerce can offer referrals. Links to local chamber websites can be found here: (West Shore Chamber of Commerce, Mechanicsburg Chamber of Commerce, Lancaster Chamber of Commerce, and Harrisburg Chamber of Commerce).
Although October is National Financial Planning Month, we should observe these concepts every month to achieve our business owners’ goals.
Many moving pieces affect the business owner’s financial plan. On top of normal activity, the pandemic has created additional struggles for small businesses due to mandatory shutdowns that cut off many businesses’ revenues. In the past few months, we have learned just how tight finances were for many organizations in Harrisburg, Pennsylvania, and surrounding areas.
Planning for an emergency could also mean working with your financial institution to obtain a line of credit during good times. Only accessing it when a need comes to fruition is a way to secure the future and a needed savings account.