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9 Steps for Small Business Owners Financial Planning

Owning a small business is a dream for people looking for the freedom to be their own boss and work to better themselves. Owning a small business can be very rewarding yet challenging at the same time. To succeed in the current economic climate, an equal amount of effort must go into a small business owner’s financial planning alongside running the business itself. As we have seen, especially in recent years, times can change in an instant and have lasting effects on people and companies. Understanding what it takes to plan for not only running the daily operations of a business but planning for any potential circumstances is required for small businesses.

Small Business Owners Financial Planning is a foundational part of business

Richardson Miller LLP works hand in hand with clients of all shapes and sizes to help them strategize, prepare and manage all aspects of their financial needs. We wanted to share our experience with those individuals looking to do it yourself when beginning the adventure of creating their businesses.

Our 9 steps for small business owners’ financial planning will help you to make sure your business succeeds in the present while preparing for the future.

1. Draw the Line Between Personal and Business Goals

Before you begin to create your financial plan, you have to set clear boundaries for the goals you have in mind. Small business owners have a detrimental tendency to go all-in when trying to create their own business from the ground up. While it is important to put extra effort and time into your new venture, financial goals need to be separated.

Be prepared for the possible outcome that you will not operate your business indefinitely. All good things come to an end. Business ventures are not immune from this fact. Separating your business and personal finances and business finance will protect yourself and your family. Protecting both personal and business finances is a key part of small business owners’ financial planning.

2. Set Your Long Term and Short Term Goals

Business goal setting requires you to look to the future while understanding the steps you need to get there can be even more valuable. A proper business plan will set quarterly, yearly, and future goals beyond.

  • Quarterly goals or 90-day goals are the small steps that will lead your business down the path to future success.
  • Yearly goals are set to make sure you are on the path you want to be on to reach your financial plan.

Whether you want to build your business into a franchise, build to sell, or provide a specific service to a localized area, creating and meeting the goals you set are the markers on the map to make sure you are on the road you want to be.

3. Build Liquid Assets

Business assets are important for your financial health. While accumulating assets, you should be careful to keep a large number of assets in liquid options. Liquid assets are assets that can easily and quickly be converted into cash on hand.

Having the majority of your assets in liquid form buffers your business from any short-term emergencies that might arise. Whether it be an unexpected cash shortage or unexpected bills, having a cash cushion available to cover you and your business is crucial to keep your business alive.

4. Track your Cash Flow

Understand the nature of your business. Taking time to analyze your cash flow and using the information to plan what to expect each month will save you time and stress in the future. Businesses work in cycles. Taking the time to sift through your cash flow histories, you will eventually be able to build a pattern so you can prepare both how to staff your business and understand when short weeks might occur.

For example, a lawn care business is a typical seasonal business where the incoming cash flow will inevitably slow down during the winter months. Understanding the cash flow, the owner can plan and set aside money from high-grossing months to cover costs and expenses during the winter months. This is an extremely high-level example, however, you can see the point to be made.

5. Prepare for Tax Season

Tax planning is one of the two inevitabilities in life as the old saying goes. Unfortunately, they can be very complicated for small business owners. You can take the DIY route for preparing your taxes, but our recommendation is to seek the services of a trusted and reliable certified public accountant. Outsourcing tax preparation and planning saves you hours and hours of accounting while also protecting yourself knowing all your tax documents are backed by a qualified professional.

Certified public accountants are trained and continue education on tax laws for your area. Tax laws can constantly change and have a major impact on your business’s financial situation. Richardson Miller LLP. offers tax and other financial services for any size business.

6. Identify Potential Risks

Business risks can lurk around every corner. Preparing for financial risks will protect you and your business from potentially major incidents. Besides cash flow shortages, there are several issues that might arise without warning. Common business risks to plan for include:

  • Employee injury
  • Legal Action
  • Property Damage and Theft

Having emergency funds and contingencies prepared for any possible outcome will keep your business afloat and running smoothly no matter the situation. A risk management plan does not have to be a pile of conspiracy theory outcomes, but a general plan set aside for instances covering multiple risks can be the best option at times.

7. Have Plans for Emergency Situations

Sometimes a situation can be more than a small bump in the road. These unfortunate outcomes can lead to business closure or even be caused by the death of the owner. Having a business succession plan and exit plan will be sure you are prepared for even the worst possible outcomes.

A business succession plan is a strategy set in place for the transfer of business ownership in extreme circumstances. You may want the business to transfer to a family member or trusted partner. Having a plan to make sure your business ends up in the right hands will help your business survive no matter the outcome.

People change and so do their goals. Small business owners might decide it is time to move on from their current business venture or lose passion for operating their current field. Developing and maintaining an exit plan will protect your financial situation despite parting ways with your business.

8. Plan for Retirement

Retirement planning is not only for small business owners, but can often be overlooked by them. Small business owners tend to put everything in their business without considering retirement savings. A structured retirement plan will make sure when the time comes to retire you will be able to live comfortably.

9. Review your Plans and Goals

Once you have created your complete business plan, the planning does not simply end. You need to constantly review and reassess your goals and plans regularly to take into account any changes in the economic climate and your business. Time for reflecting on if your goals were met will help light a fire or set you at ease so your business is on the track you envision. These comprehensive reviews are suggested yearly, at minimum, if not every quarter.

If this sounds overwhelming, don’t worry – Richardson Miller LLP is in your corner. Give us a call and we can help you get set up.

We’re happy to answer your questions, clear up any confusion and get you on the right path. Having clean, up-to-date books will make tax time so much easier for you!

Richardson Miller LLP is here to keep you on track and ensure that your taxes and accounting needs are met. Contact us today!

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My Company is Profitable… So WHY AM I BROKE???

Profit and Loss Statements Don’t Tell The Whole Story

Your profit and loss statement showing you positive numbers. Yet you are struggling to find the cash to pay your bills on time. Or perhaps your sales volume has increased but you have less cash than ever? Sound familiar? Cashflow (defined as the net amount of cash being transferred in and out of a business) can make or break a profitable business. Poor cash flow can cripple a businesses ability to increase sales volume or if prolonged, can result in bankruptcy.

How to Improve Cashflow

  1. Get Paid Faster. It doesn’t matter how high your revenues are if your customers don’t pay you. Check out the article for some tips on how to speed up the collection process.
  2. Structure loan repayment terms appropriately. Are you trying to aggressively pay off that equipment loan in only a year or two? Talk to your accountant and banker about appropriately structuring that debt over the useful life of the asset.
  3. Take advantage of free credit. Are you paying your bills as soon as they arrive in the mail? Try waiting until the date that the payment is due or negotiate longer payment terms.
  4. Monitor inventory. Keep inventory at a reasonable level for your business. Several months’ worth of product sitting in your warehouse isn’t going to help when your checks start bouncing.
  5. Monitor overhead costs. Every little bit helps. Take the time to carefully review your subscription costs, telephone bills, vendors. Are you paying for things that you no longer need? Are there opportunities to negotiate a better deal?

How NOT to improve Cashflow

  1. Postpone filing and paying your source deductions with Canada Revenue Agency. The penalties and interest are not deductible for tax purposes and can add up in a real hurry. Continual late payments can also get you flagged for a payroll audit.
  2. Postpone filing and paying your GST/HST. Similar to your payroll, Canada Revenue Agency gets pretty cranky when these payments are late. Not paying GST on time is a great way to get your bank accounts seized.

Cashflow Analysis

Have you ever analyzed your cash flow?

A full analysis can be an eye-opening experience to realize the health… or the limitations of your current business operations.

Can You Afford to Grow Your Business?
  • Does your business incur direct costs prior to receiving payment from customers?
  • When are you required to pay your vendors/employees?
  • Compare this timeline to when you typically receive payment from your customers. How long are you required to finance your sales?

This gap between paying for costs and receiving money from your customers is referred to as your working capital days. The greater your working capital days, the greater your requirement to finance when you increase your revenues.

Do you know how many working capital days you’re currently financing in a line of credit? How much financing is required to grow your sales volume by $100? A detailed professional analysis can provide insight.

Example:

Picture a trucking company in Alberta. The typical customer tends to pay within 65 days from the invoice date. The company must pay its employees at the end of the month. During busy times, management relies on subcontract drivers who also demand payment by month-end. The company must also pay for fuel, repairs and various other costs within a timely basis. On average, the company must pay its’ costs within 25 days.

Based on current operations, this company must finance the costs of their sales for a full 40 days before receiving payment. The company relies on lines of credit and reserve savings to finance these sales. When sales volume increases, a larger line of credit is required. Consider additional costs associated with grown (equipment, staffing, etc.) combined with a larger line of credit. At a certain sales level, if cash flow is not carefully monitored, the company may simply not be able to obtain enough financing to grow.

The Power of One

The power of one (as part of a professional cash flow analysis) can be a useful tool in truly realizing the impact of minor changes in your business operations.

What would your cash balance/income/value of the business be if you:

  • Collected your accounts receivables just one day sooner
  • Paid vendors just one day later
  • Increased your sales volume by 1%
  • Increased your prices by 1%
  • Decreased your cost of sales by 1%
  • Decreased the cost of your overhead by 1%

These tiny amounts can equate to significant differences in the health of an organization. Perhaps that line of credit could turn into a positive cash balance. Quite often, this illustration can aid in management decision making.

Sometimes that decision is: We can’t afford not to hire extra office staff to help us keep on top of invoicing and collections.

Call me to discuss how a professional cash flow analysis can benefit your company.

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