Post Updated on August 23, 2024 by Taylor.
The joys of business ownership are vast, deep, and stressful. I say that from personal experience because I am a business owner, myself. I’ve owned Four Points Financial Management since 2020. And I’ve learned a thing or two, both from my clients and my own experience, about the importance of balance when it comes to personal and business financial planning.
So when it comes to financial planning for business owners, I’ve got more than a few tips—four of them, to be exact.
Your Personal Finances Affect Your Business’s Success
I’ll start with this: it’s important to understand the correlation between your personal financial plan and your business success. If you’ve got your personal financial plan in order, your business is going to benefit. This applies to banking, getting loans, managing cash flows, and overall how you show up for your employees and clients.
Financial stress is a killer for a lot of businesses. It can bring down the actual financials that keep the business going, of course, but also the culture. When a business owner is extremely stressed about money, that percolates to the rest of the organization.
From a leadership perspective, having your finances dialed-in exudes confidence and strength. This will only add value to your business.
Tip #1: Treat Your Personal Finances Like Your Business
My first tip in financial planning for business owners is to treat your personal finances like your business. I’ve met a lot of business owners who have all their books in order. Their taxes are easy because their finances are dialed-in every year. It might not all be perfect, but it’s organized. This is great. They’ve got a solid understanding of their financial plan and outlook.
And then I’ll look at their personal finances. And it’s in complete disarray. This can lead to that very stress I mentioned earlier.
So, apply the same high value accounting principles to your personal money management. Make sure you’re checking your bank accounts, staying attentive to what’s going in, what’s going out, and how money is being spent. Notice where you are saving and where you could be investing.
It’s important to note not only how your money is being used, but also how it’s not being used. I have one client who had a lot of cash coming in—which is great—but they didn’t have the bandwidth to take advantage of it. When cash is piling up, you want to work the right investment strategies to capitalize on it. Let that money work for you.
When you treat your personal finances like a business, you gain the clarity and peace-of-mind that all of your assets are working in your favor.
Tip #2: Separate Your Business and Personal Finances
This tip might just be the most important. It’s imperative to create separation between your business and personal finances. I cannot stress this enough. If you are commingling your assets, that can be very detrimental, piercing the veil of your corporate structure.
It could also put you in a position of personal liability for your business, if you’re not careful. So, creating separation is key.
Separate your checking accounts and credit cards.
Decide which accounts you’ll use for business vs personal. Make sure you’re writing your transactions correctly. If you accidentally use the wrong account, come up with a game plan to rectify that.
Separate your savings accounts.
Are you actively putting away money every month or are you just using your retained earnings as your savings account? That can be a dangerous game. Dipping into your retained earnings to cover your personal expenses can get very messy very fast.
I’d advise being deliberate here and paying yourself wisely. If you’re not paying yourself adequately, and you feel like you’re under-funded, that can be extremely challenging. It affects all of your day-to-day expenses, especially if you have family and other necessities to support.
Separate your investment strategies.
Create an investment vehicle outside of your business. I know so many people that go all-in on their business. While that is fantastic, they are not looking at the other pieces of the pie. It’s important to diversify away from your business to avoid looking at it in a single-minded way.
I can relate to the impulse to go all-in, but I do have money set aside outside of my business, just in case something happens there. When push comes to shove, I want to rely on a variety of investment strategies to strengthen my wealth management plan. I don’t want to rely on my business alone.
Don’t rely on your business as your retirement plan.
Many business owners want to eventually sell their businesses. In fact, that’s usually their exit strategy. That’s their retirement plan. And while that can be awesome for some, about 80% of businesses don’t actually sell for what they’d anticipated. That can be a tremendous downside to your overall planning.
You’ve built something up that’s valuable to you, but someone else might price it differently—and that could hurt you badly.
If you’re setting money aside for retirement, do so deliberately and intentionally. In other words, diversify your retirement options.
Tip #3: Manage Your Cash Flows Properly
This is a huge one because your business cash flow and financials can be two different things. You might notice that you’ve got plenty of accounts receivable to count on, but if that money isn’t coming in properly, the cash flow for your business could get hurt.
Unreliable cash flow can hurt you on a personal financial level. Why? Because you have to come up with payroll. You have to be able to pay your quarterly tax payments. You need to be able to pay last year’s taxes. You need to be able to rely on your cash flow to cover your anticipated expenses.
In fact, I have a client who told me about mortgaging her home to cover payroll early on in building her successful business. We can look back now and laugh but at the time it was an incredibly stressful time.
So, having your cash flows dialed-in—and planned—is extremely important. For my own business, I plan my cash flow quarterly. This helps me understand where money is coming in, how to allocate it, and what we can afford moving forward. For example, are we ready to make that big investment in the website?
Do we want to buy a new computer? Can we afford taking on additional desired services or expenses?
Tip #4: Expect the Unexpected
My final tip when it comes to financial planning for business owners is to plan for the unexpected.
I love entrepreneurs. They are so optimistic—so optimistic. And that’s a necessary trait to ensure their businesses success. They want their businesses to go to the moon. They have to believe in themselves to get there. And, thankfully for my entrepreneurial clients, it’s working.
That said: it’s important to give yourself room to think about multiple future outcomes. If your core vision doesn’t pan out the way you hope, do you have a contingency plan?
This isn’t about betting on failure, it’s about being a good planner. Just like when you go out in the back country or on a bike ride—you need to bring tools in case something happens. What if a tire blows out or you get caught in an avalanche? Do you have the right gear to bail you out?
The same can happen in a business. The unexpected might not bury your company, but if you don’t plan any contingencies, it could lead to a bigger surprise. This could snowball and hurt the business even more.
When it comes to the personal finance side, think about life insurance. Think about disability. Think about saving outside of the business. Of course, this ties back to creating separation and diversifying your options.
Creating contingency is simply about saying to yourself, “if this were to happen, these are my outs.” Just like a good poker player looks at a hand and says, “what are my outs? What’s the opportunity to lay it down, walk away, and start fresh with the next hand?” If you can play that game in both your personal and business pursuits, you’re setting yourself up for extraordinary success.
One More Thing
I opened by naming the fact that your business and personal finances are inextricably linked. And I will close by saying this: if you allow your financial planning lens to encompass both your personal finances and business together, it can be paramount to the exit of your business.
As a Certified Exit Planning Advisor, I encourage all of my business owners to align their personal financial planning with their business planning. If you have your personal finances dialed-in, your business is likely to be more successful—for a lot of reasons.
But when it comes to the exit, you’re far more likely to get the price you want. This is because you’ve done the work ahead of time. You know how to crunch your actual value, you understand the ins-and-outs of your cash flow, and you’ve done the work internally to secure your personal finances. At the end of the day, it’s a win-win.
At Four Points Wealth Management, we are here to guide you on your financial journey. Let’s work together to integrate these tips into your own business and personal financial planning. I’m always happy to answer any questions you may have and build a plan accordingly. Happy planning!
Four Points Wealth Management
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