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4 Small Business Financial Planning Tips

Small Business
café owner ponders his small business financial planning decisions as he cashes out female customer

Small business financial planning can sometimes end up on the back burner. After all, you have enough decisions to make in your day-to-day operations. But working without a plan not only hurts your personal finances, it could also put your enterprise at risk. Here are some ways — which are sometimes overlooked — that you can help fortify your business's financial security.

1. Insure Key Employees (Including Yourself)

If one of your key employees dies or becomes disabled, it could set your business back. You would be operating at a reduced output until you can find another person to fill that role and, at the end of the day, there's no guarantee you'll find someone who can do as good a job.

You're a key employee as well, by the way. If anything happens to you, where would that leave your business?

To cover this risk, you can buy key person insurance, a form of life and disability insurance. That way, should the worst happen, your business can receive an insurance payout to offset the cost of losing the employee.

If you bought a car or expensive piece of equipment, you likely wouldn't dream of leaving it uninsured. Your best employees are your most important business assets, so it makes sense to do the same with them.

2. Reconsider the Right Business Structure for You

When you launch a business, you need to establish a structure. If you don't set one up and you're the only owner, you become a sole proprietorship. If there are multiple owners and you don't file a specific structure type, you have a partnership. Once you've set up a specific type of business structure, you can also file to change it.

Working as a sole proprietorship or partnership can be riskier than other structures, because you're personally liable for business issues. For example, if a customer sues your business, they could potentially go after your personal assets for repayment. With these structures, it's usually advisable to have the right liability insurance in place to cover your legal risk.

Other business structures have limited liability, which adds an extra layer of legal protection. These include a C-corporation, S-corporation and LLC. Each structure has its strengths and weakness with things like how much you'll owe in taxes or how hard it is to bring in new investors. The key is to pick the right option for you from the beginning, because it can be an expensive and complicated process to restructure. But that doesn't mean you shouldn't consider changing if necessary.

If you haven't already, you might consider revisiting your current business structure or meeting with an advisor to discuss the different options in order to determine the right match for your organization.

3. Create a Company Retirement Plan

In a 2017 survey from the Employee Benefit Research Institute, 73 percent of workers said a retirement savings plan was extremely or very important in their decision to stay at a job or accept a new job offer. Out of all workplace benefits, only health insurance ranked as more important.

If you don't have a workplace retirement plan, you're likely at a hiring disadvantage compared to the competition. You can show employees you care about their future by setting up a workplace plan like a 401(k), SEP IRA or SIMPLE IRA.

A workplace retirement plan can also help you save for your own retirement. These plans typically let you save more per year than an Individual Retirement Account (IRA), and with tax-deductible contributions. Even if you think you'll have enough for retirement after selling your business, it's important to build your own financial preparation. If you end up selling for less than you hoped, you may still be able to retire comfortably.

4. Build a Succession Plan

If you can't imagine your business running without you, that's a problem. In order to sell your business, it has to have the potential to remain successful after you leave. Developing a business transfer/succession plan that sets out who will eventually take over your business and how you'll train this person for the role is an essential task in small business financial planning. That way, if you leave work earlier than expected, like after a sudden disability, someone is ready to step in.

When you meet with an advisor to discuss your succession plan, you could also start figuring out the future tax impact. If you sell, you'll incur a tax on your gains, and if you transfer to a family member, they could owe gift or estate taxes. Handling financial planning for business owners early on can give you more time to prepare for and minimize these tax consequences.

Preparing these financial strategies should be an integral part of your business plan. By addressing these small business necessities now, you can help leave your business and your personal finances in a stronger position overall.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.