5 Keys To Good Financial Planning for New Entrepreneurs

People seem to have a clear idea of what they want for themselves when it comes to financial planning for their personal life, but a lot of business owners ask me, what does it mean to do financial planning for your business?Fundamentally, there are always six keys areas to consider, just like on the personal side. These six areas would include:
Current Foundation – This covers your debt, cash flow, cash reserves and how you manage your day-to-day business. This is where most new small business owners place most of their attention.
Risk Management – Whenever you see the word “risk,” just remember that it’s a fancy name for insurance. Without going into all of the types, insurance connected to your business is simply to protect everything relevant to your business, from computers and equipment to your actual ability to earn income and cover expenses.
Investing – Most people think of small business retirement plans as the only thing that falls under the investing category, but it can also address buying business-owned real estate and taking a laddered approach to organizing cash.
Taxes – With taxes, you want to make sure you’re taking advantage of all of the deductions, deferrals and depreciation you qualify for, and have a way to track and manage those things so you’re not stuck with a grocery bag full of receipts, come tax time!
Goal Planning – This starts to overlap with Strategic Planning; the distinction I make between the two is that ongoing financial planning will translate strategy into specific behaviors you perform every day that bring you back to your financial goals, and then monitor progress.
Succession Planning – For most people, the idea of transition OUT of their business is VERY far away. Succession planning asks how you plan to finish this business both as planned and in case of emergency.
Business financial planning covers a lot of territory; for young entrepreneurs, there are 5 steps they can take-not encompassing ALL of these areas-but 5 steps that really take them from acting like a “hobby-preneur” to an established business owner:Use financial management software. I know a lot of entrepreneurs in the early years just hold onto receipts for tax time, and believe me, you cannot understand your profitability until you have an ongoing system that captures income and expenses. It doesn’t have to be complicated and Intuit even has a Sole Proprietor Quick Books version, but this is an issue of respecting what you inspect and using it to plan your next moves.Hire a bookkeeper. The best money I ever spend is on SOMEONE ELSE to keep my books organized so I can go do the thing that I do well-and I don’t think ANYONE who is not a bookkeeper should be spending time balancing accounts and categorizing expenses. You can spend as little as $100 per month, but I encourage you to build it in to your budget early on, so that it becomes an expectation that you’re never stuck working on it yourself. And, make sure your financial management software has online access, because a lot of bookkeepers will give you better rates if they can access your stuff online, versus coming to your home or office.Keep finances separate. Admittedly, there is an easy way to allocate personal spending when you’re tracking it, but why create the problem? Your income is REVENUE MINUS EXPENSES. Get a separate account at your same bank that you have your personal account at, and it’s simple. Also, if you have a business structure other than sole proprietor, you can lose your liability protection if the prosecutor can show that you were commingling. See your attorney if you have concerns about that!Establish business credit. Even if you are a sole proprietor, I encourage you to get a Federal Employer Identification Number or EIN, even if you don’t intend to hire employees. The EIN is like your business’s social security number, and you can start establishing credit in its name apart from your own personal credit. When you get that separate bank account, open it in the name of the business and EIN, and then get the credit card that usually goes along with it. You’ll need to speak to an attorney to get your EIN, one who handles business formation, and they can also tell you the best business entity to use.Find and exploit your key business drivers. When I go into a business, I can usually identify specific activities that the entrepreneur engages in to acquire more clients or sales, and with financial reporting, we can analyze, adjust and adapt behavior to get the result they want. When I coach other financial advisors, it always breaks down into more face time, which can translate into simply phoning clients to holding more marketing events, depending on their specific goals. With another client, his driver was scheduled appointments. We found he was at his capacity, so he brought in an associate and was able to schedule appointments sooner. Consequently, new clients didn’t have to wait as long to get into the system, and his income automatically went up 20%.Financial planning for business doesn’t sound as glamorous or sexy as strategic planning or marketing, but prioritizing it WILL help young entrepreneurs manage their business more effectively. Paying attention to the link between activity and financial results will get your business off the ground faster than those who don’t prioritize financial planning for their businesses!

What Is the Big Deal With Financial Planning?

In today’s uncertain economic times, financial planning has become critical in order to meet life’s financial goals including retirement. A thorough analysis of the current financial picture will help point the direction toward meeting those goals and will help avoid excess spending. This includes maintaining a rainy day fund, not relying on social security and calculating the amount of the nest egg.What is Financial Planning?Financial planning means analyzing the current financial picture, determining what the long-term goals are and then devising strategies to reach those goals. Strategies can include a variety of things, including automatic deposits into savings accounts, investments in stocks or real estate, or even insurance plans. The key is to make sure those plans are flexible. Not only can goals change, but so can strategies as your situation changes. Marriage, kids and a home all have a way of changing our priorities.The Here and NowHowever, financial planning is not just about the future; it’s about the present. Because this type of planning requires a full analysis of the family’s current financial picture, they know their exact net worth, income, and expenses. As a result, they are better able to manage spending and can avoid living paycheck to paycheck. They will also avoid being caught unaware by massive debt. An important bonus considering the average American carries a credit card debt of around $16,000.Expect the UnexpectedA major component of any financial plan is a rainy day fund. This is a separate savings account that is set aside for emergencies only and usually contains at least three to six months of expenses. The reality is that no one is safe from unexpected illnesses, accidents or unemployment. Insurance, while another important part of the plan, may not cover everything and may not be easily accessed. In fact, some studies have shown that families without such a backup are far more likely to accumulate debt during a disaster.Retirement NumbersRetiring some day? Well, don’t count on social security. Not only is the age being increased to 67 for those born after 1959, but it may not be there. The reserves held in trust to fund social security are expected to be exhausted in 2037. After that income tax will only be able to pay 75 percent of expected benefits. Medicare isn’t any better and is expected to remain solvent only until 2029. As a result, Americans had better get busy with financial planning if they want to have a nice retirement.How Much Is Enough?The answer to this really depends on a person’s standard of living and the goals he or she has. However, some experts suggest that people should expect to spend about four percent of their savings each year. That means if expenses are approximately 60,000 per year, they should have a targeted retirement fund of 1.5 million. Sadly, most Americans are not even close. Those between the ages of 65 and 75 have an average of around $56,000. That means they get to spend roughly 2,200 a year.These numbers suggest one thing – Americans need to get busy financial planning! Analyzing their current financial picture will help them avoid being buried under a mountain of debt and will help keep them on the road to a wonderful retirement, even when disaster strikes. Plus, a failing social security system will not blindside them and leave them penniless. Financial planning is the smart and responsible thing to do.