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Smart Finances for Small Business Owners (Expert Q + A)
This is a guest expert interview with Stephanie Vail of Custer Financial Advisors.
You’ve started a business based on something you’re passionate about – but along with the invigorating work, there are all sorts of less-than-thrilling details to consider. Like managing your finances.
Taxes, saving for retirement, and protecting yourself (and your family) from the financial risks of running your own company, just to name a few.
These things might not be fun, but they’re too important to ignore. Putting a solid, smart financial plan in place right from the start will protect what you’re working so hard to build and help you maximize it for the future.
To help you get started, I’ve asked Stephanie Vail from Custer Financial Advisors to weigh in on some big money questions that small business owners have.
Q: What smart things should small business owners do to prepare for retirement?
When you’re self-employed you are in charge of your retirement savings. What you save is what you get since there is no company match or pension plan. Because of this, the IRS gives business owners a lot of benefits when it comes to saving for retirement, but they don’t do you any good if you don’t take advantage of them.
Small business owners have a lot more options available to them when it comes to retirement plans than employees, so I’d encourage them to take advantage of the tax advantages that come with setting up a retirement account. Popular investment accounts for small business owners include Simple IRA’s and SEP IRA’s. Both are pretty easy to setup and allow you to deduct the amount you invest for retirement from your taxable income, which can result in a big savings for business owners.
I really can’t stress how important it is to start saving for retirement as soon as you can, even in small amounts. It can make a big difference in the amount of taxes you pay and what your options are when you’re ready to retire. If you’re not sure of where to start, ask your accountant or a financial advisor what the best options are for you.
Q: What practical steps can business owners take to protect themselves from the financial risks of running their own company?
Protect yourself and your family by having a good emergency fund. A good rule of thumb for business owners is to have 6 months of expenses (not necessarily income, but the minimum amount you’d need to live) saved in the bank. This protects you and your business; if the business struggles for a while you can still support yourself and you’re less likely to close the business in order to get a job to pay the bills.
The proper type of insurance is important. If you use your home or vehicle for work purposes check with your insurance provider to make sure you’re covered for business related activities. Depending on what type of business you run a Business Owner’s Policy (sometimes called a BOP) might also be a good idea. These are designed to offer a variety of protections to small to mid-size business owners.
Look into health, disability, and life insurance. Many people these from their employers. Because you’re the boss, these things are left up to you. Talk with a financial advisor or insurance professional to see what your options are.
Consider becoming incorporated by setting up an LLC or S-Corp for your business. This will help create a “shield” between your personal money and the business, so if something happens to your business as long as you’ve followed the rules that come with setting up a corporation creditors and attorneys could only go after your business money rather than your personal assets as well. This could mean keeping your house, car, and personal bank accounts if something terrible happens to your business.
Q: What are your top tips for keeping your personal and business financial life organized as an entrepreneur?
Keep your Business and Personal Income Separate: If you are an LLC or S-Corp this is an absolute must, but for any business owner it’s important to keep your personal and business income in different bank accounts so you know just how the business is doing and what the income and expenses are.
I recommend keeping two separate bank accounts for your business income. One is where all the business income goes into and the expenses come out of, so you have a real sense of how the business is doing. This account should have a credit or debit card tied directly to it for business expenses, rather than paying them out of personal funds. The second bank account is for taxes.
Have a Plan to Pay Your Taxes: Determine your estimated tax rate for the year and automatically transfer that percentage of all new income into a different bank account when you earn it. It is much easier to pay the taxes off the top of your income out of a designated bank account than try to keep track of how much needs to stay in your normal account for tax time.
For example, if your total tax rate (Federal + State + 15% Social Security + City) is estimated to be 35% put $350 of every $1,000 in a separate bank account immediately when you get paid. That way the money will be sitting in a separate account that you haven’t been using for expenses when your quarterly tax payments roll around.
Develop a Plan to Track Income and Expenses and Make the Most of Tax Benefits: The IRS gives some great incentives to business owners to help encourage new business and provide some relief for the heavy tax burden self-employed people face. Take advantage of all the deductions and credits available to you. Develop a plan to track all your expenses and receipts, business miles, and any other deductions or credits available to you. A few dollars here, a few dollars there doesn’t feel like a lot at the time, but it adds up fast and can make a big difference come tax time. If you aren’t sure where to start with deductions, it’s a good idea to talk with an accountant.
Plan for the Slow Season: Most small businesses go through cycles, whether they be by season or years. Plan for a time when you will have a slow season. Know whether you can live off the income from your slow season or if you will need to save extra funds up to get you through a slower time.
Get Organized: If you own a business you need to be organized with your financial files. If you need help with this, ask. Banks, customers, and the IRS are not impressed by business owners who can’t keep their important documents straight.
Don’t Give Up: I recently asked one of the local business owners I most admire what he thinks made his businesses successful in a market where a lot of new businesses fail. He responded that “most business fail because they get discouraged too early and give up too soon.”
It’s perfectly normal for a new business to not generate any income for the first few years. There will be days when you feel like things will never work out. Don’t give up. Make sure there is a market for what you’re doing and that you have good business practices and honest friends and advisors that you trust, and then keep pursuing your vision, even when the process is slow.
Q: How can a financial advisor make a small business owner’s life easier?
Because you are on your own for things like retirement savings, health insurance, and life and disability insurance, a financial planner plays an important role in helping you do the things most people have a Human Resources Department to help with. This includes creating a plan for retirement and using the many tax-advantaged options available. Retirement plans can even be set up to automatically invest money monthly, which can make them feel very similar to a 401(k) option you might find at an employer.
In my experience, many business owners are passionate and skilled at what they do but don’t enjoy the bookkeeping and financial side of running a business. A good financial advisor can help you create a spending and saving plan for your business and develop a system to keep track of the finances so you have an honest picture of how the business is doing. They can also work with an accountant to take advantage of tax benefits available to you, which can result in a big financial savings.
Q: If you were talking with a small business owner and could only give them one piece of financial advice, what would it be?
You’re in charge, but you don’t have to be on your own. One thing I’ve noticed working with business owners is that many of them stumbled into running a business. The thing they’re good at and passionate about suddenly took off and now they find themselves navigating things like paying taxes, creating an LLC, and keeping financial records.
It can be intimidating running a small business. There are a lot of things you need to get right and the learning curve is steep. You can’t avoid or ignore these responsibilities, they are a part of the joy and heartache of being self-employed, but you don’t need to do them on your own. Don’t be afraid to reach out for help with things like taxes and money. No one expects you to have these things all figured out. What matters most is that you have a team of helpers you trust to help you navigate the business stuff so you can keep doing what you’re passionate about.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
About The Author
Stephanie Vail is a member of the Custer Financial Advisors team. She specializes in helping millennials with financial literacy and planning. To learn more about Stephanie and Custer Financial Advisors, visit www.CusterFinancialAdvisors.Com or email Stephanie at SVail@lpl.com.