Starting a small business can be exhilarating and overwhelming all at once. It’s tempting to devote the lion’s share of time and effort to developing your product or service, hiring the right people and finding customers. But it’s important to carve out some time to tend to the financial health of the company. It’s similar to how airlines recommend attaching your own oxygen mask before helping others: You can’t fulfill your customers’ needs or empower employees if you suddenly find yourself in a liquidity crisis.

What is Financial Planning?

Small business financial planning is an ongoing process. Your objectives: Develop short- and long-term business and fiscal goals and tactics to achieve them. Do some scenario planning to understand the financial barriers that can arise at every stage of growth, and consider your options in terms of funding sources.

9 Financial Planning Tips for Small Business Owners

While many aspects of small business financial planning are similar to handling personal finances — think creating a budget, risk management, tax and investment strategies and retirement and estate planning — there are some important differences.

1. Separate business and personal goals.

Blurring the lines between personal and business goals could mean compromising some aspects of your finances for another. Perhaps you want to add a new product to your inventory but also want to add funds to your child’s 529 plan. Which takes priority?

Of course, you’re building the business to make money to forward your personal financial goals. But if you don’t distinguish between personal and business objectives, you may end up hurting both.

We’re not just talking about separating your finances, including having separate checking accounts, for example — though that’s also critical, as we’ll discuss. We’re talking about visioning and goal setting. Ask yourself:

  • Personal: What are my immediate personal priorities? Examples: Get more exercise, learn a new skill. What’s my five- and 10-year plan? What are my family’s priorities?
  • Business: What are my immediate business priorities? Examples: Hire a new employee, make a marketing plan to acquire more customers. Where do I want my business to be in five years? What are our product or service development priorities?

2. Explore your funding options.

Small business owners tend to self-fund, or bootstrap, meaning that personal funds are the owner’s only or major source of capital. Putting money back into the business makes sense: Bootstrapping allows you to slowly and organically grow your business while ensuring that the model is financially viable.

On the downside, you’re not well-diversified. Using savings or credit cards for startup capital can put you at significant financial risk, depending on how capital intensive your business is.

It’s prudent to offset some of that risk by exploring one or more additional sources of funding.

Financing Summary

Venture Capital Angels Crowdfunding Accelerator Incubator
Support Level High High Low High High
Equity Required 20-25% 25-45% No except for equity crowdfunding 7-10% No
Capital Allotment High Medium – High Usually low Low Usually none
Repayment Required? No No No No No
Grants Pitch Competitions Business Loans Friends & Family Bootstrapping
Support Level Low Low Low Low Low
Equity Required No Varies No Varies No
Capital Allotment Usually low Varies and only goes to winners Varies Low No
Repayment Required? No No Yes Yes No

Fortunately, there are plenty of other places to get capital. Bringing in outside sources, such as offering equity and getting a good or service in return, business loans or customer presales or recurring sales can ensure a constant inflow of capital.

3. Focus on liquidity.

Sure, your balance sheet shows you that your business is financially sound, but it doesn’t mean your assets are liquid. The goal should be to have more assets than liabilities, so you have a buffer to meet short-term financial obligations.

And, the professionals controlling those external funding sources — like business lines of credit or inventory/receivables factoring — will expect you to have a view into your liquidity status. Some key points are that while cash, not P&L, is your main metric, there are additional important KPIs like the cash conversion cycle (CCC), days sales outstanding (DSO), days payable outstanding (DPO) and days inventory outstanding (DIO) that all companies should track.

Some small businesses may even want to assemble a “cash committee” to closely monitor daily metrics and report back on liquidity status.

4. Cash flow.

A healthy cash flow enables you to meet current obligations, like paying employees and purchasing raw materials, while also building up a reserve for investments and emergencies. Amassing assets, like real estate or inventory, is great, but if cash flow is a challenge, your business will stall.

Performing a formal cash flow analysis will tell you how much money is flowing in and out of your business. This knowledge allows you to plan accordingly. When you do these analyses regularly, you will gain historical perspective and be able to determine the amount you should set aside as reserves to weather the leaner months or an unexpected cash flow shortage.

5. Manage taxes.

Going the do-it-yourself route may work for your personal finances, but tax planning can be far more complicated as a small business owner. Outsourcing tax planning and preparation to a qualified certified public accountant (CPA) or other financial professional who may be helping with your business will not only free up time, but that expertise may reduce your tax liability.

A CPA knows tax laws in your area inside and out and can advise you on various strategies, such as how to maximize qualifying business expenses and the amount to pay in estimated taxes so you don’t end up with a big bill — or giving Uncle Sam an interest-free loan.

One note: One business valuation expert has seen founders make a mistake by trying to structure their businesses to minimize the payment of taxes. When they’re successful at that, net income might be zero or even negative. However, that can cause major problems when seeking funding or investments.

6. Risk management.

Identifying and mitigating risk is something every small business needs to do, but it often falls to the bottom of the list simply because creating a plan that addresses all potential perils seems like a massive task. And yes, it is virtually impossible to address every risk that could possibly affect your business. But you can certainly narrow the list and put safeguards, like cybersecurity insurance and a crisis communications plan, in place.

Scenario Planning vs. Business Continuity Planning

Scenario planning is often conflated with business continuity planning. While both are structured processes, scenario planning plays a longer game that considers revenue over time. Business continuity planning is about how your business will react to a disaster, such as a warehouse fire or earthquake.

In both processes, the journey may be as valuable as the final work product. By bringing leaders together to think through what could affect your business, you may head off potential risk.

Here are some things to consider when crafting a risk management plan:

  • Provide the right amount of coverage for yourself and your employees while avoiding overpaying for healthcare and worker’s compensation coverage
  • Include cash flow contingencies in case of a business interruption due to a disaster or death of a key person.
  • How will you cope with the loss or theft of business property or fraud by an employee, supplier, partner or other third party?
  • Consult with counsel about protecting your business from lawsuits.

Note that you don’t need to start from scratch. The Small Business Administration provides a free “Risk Management for a Small Business” training guide.

One existential risk for any business is the loss of the founder or other key leader — do you have a plan for what happens when you must or want to leave?

That leads us to the next three items which, while related, deserve their own plans and attention.

7. Create succession and exit plans. 

These are two different scenarios. In a succession, you’re turning the reins of the business over to the next leader. In an exit, you are selling or shutting down the business. As with risk management, the SBA offers a template for succession planning that also includes a section on selling the business.

When deciding whether to sell, close or pass along the company you’ve built, the Small Business Administration recommends looking at a few factors. Have you received a job offer from another company or a purchase offer for your business or your business assets? Are you satisfied with the business’ profitability? Do you foresee market or industry changes that you can’t or don’t wish to adapt to?

On a personal level, are you ready to retire or find you’re working too many hours? Are you simply no longer passionate about the business and ready to try something new? Answering these questions should provide clarity into your next steps.

Let’s look at both succession and exit.

Exit plan: If you wish to sell your company, you need an idea of the value. In fact, even if you aren’t looking to sell, it’s smart to always have a ballpark idea of the business’ market value. Experts advise looking at what similar firms have sold for recently, consider qualitative factors such as whether executives plan to stay on and decide what payment terms you’ll accept.

Succession plan: This is a strategy to cede control of the business to one or more people, or an acquirer. If the former, decide if you will pass the company on to a family member or an employee, and begin training. You’ll still need to know the business’ value, so take the steps mentioned above. Bring in an attorney and a tax professional early on.

8. Plan for retirement.

Retirement planning is crucial for everyone, business owner or not. Experts recommend saving at least 15% of pretax income for retirement in a tax-advantaged plan, such as a simplified employee pension individual retirement account, or SEP-IRA. Any employer, including sole proprietorships, are eligible to establish SEP-IRAs. You can extend this opportunity to employees.

As with taxes, an experienced financial planner can walk you through your options to create a plan suited to your company’s needs.

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9. Create an estate plan.

Proper estate planning helps to provide for your loved ones, business partners and employees who rely on your business; minimize tax exposure; and provide clear instructions on how the business should proceed. These plans are also critical in case you’re incapacitated. There’s no substitution for having an experienced estate planning attorney help you create an airtight plan.

Creating a customized financial plan is an ongoing process. Find trusted advisers who can offer advice and help you develop actionable steps. Successful small business financial planning is an ongoing process, and done successfully, these strategies will optimize performance and show customers and employees that you’re looking out for their welfare.