Financial planning is a big-picture process that many people are not fully comfortable with. Business owners will often avoid financial planning, assuming that if they work hard enough and achieve enough success with their companies, everything will all work out in the end. Some businesses are successful enough for this to be true, but for most this is wishful thinking. To achieve your goals and dreams – and have enough money to retire on – you need good financial planning too.
Too Busy to Plan?
CEOs and owners are busy people. They often can be found putting out fires and making sure their companies are running on all cylinders today. Twenty – or forty – years from now is too far down the road to think about. But planning is like steering. If you have no steering wheel, your vehicle will move forward, inevitably in a direction you don’t want it to. Creating a financial plan is like installing a steering wheel. It may take an investment of time and effort, but it will make all the difference in your eventual outcome.
Your financial plan should involve:
- Deciding on realistic personal and financial goals
- Determining where you are financially now and where you want to be
- Creating a plan to reach those goals
- Putting that plan into motion
- Evaluating your progress periodically to determine success
- Adjusting the plan accordingly
Types of Financial Planning
There are many aspects of financial planning, and these all have complex financial, legal, and personal ramifications. We recommend that you consult a professional financial planner or CPA if you are not an expert in:
- Cash flow planning
- Investment planning
- Retirement planning
- Risk management
- Tax planning
- Succession planning
- Estate planning
Let’s go over each of these briefly.
Cash Flow Planning – Your business may be very valuable in its assets, but any company needs to have a certain amount of liquidity in order to operate and additional set aside in case of emergency. Owners also need to have money available for personal use or unexpected problems or opportunities. It’s not ideal to borrow from personal funds to help float the business when times are lean, especially if the business is in real danger of going under. This is why learning to manage cash flow and having a plan in place before there’s an emergency is crucial.
Investment Planning – Diversification of assets is a tried and true strategy for investing. Everyone’s personal situation and risk tolerance are different, so the first step in creating an investment plan is to decide how you intend to allocate your assets. A financial planner can help you determine what your cash flow needs will be, what your timeline of investing should look like, and what kinds of risks might be appropriate to take given your current situation, goals, and present and future needs.
Retirement Planning – We’ve often discussed exit planning and succession planning in terms of eventual retirement. Not all investing is about retirement. Often people choose to set aside money for other goals like providing children with an education or building a dream home. However, old age awaits everyone, and it’s best to be prepared for a time when you will not be able or will not want to work so hard. Take the time to realistically determine how much money you will need to live in retirement, and what you will need to do to accomplish that goal over time.
Risk Management – Unfortunately, there are many things that can go wrong in life, and it’s important to protect yourself and your assets from major disruptions that can occur as the result of a lawsuit, a flood or fire, a medical event, or a death. Various insurance products exist to mitigate that risk, and creating and maintaining buy-sell agreements is always a good risk management strategy for a business owner with partners or family members who are a part of the present or future of that business.
Tax Planning – The tax code is such a complex and every changing behemoth that it is always advisable to consult a CPA to help you meet your tax obligations and limit your personal and tax liability wherever possible.
Succession Planning – We have discussed the benefits of succession or exit planning many times before, and as we always say, the earlier you begin to plan your exit, the more impact you can have on your future, including retirement.
Estate Planning – Finally, every owner should have a plan in place for how he intends to allocate his estate, including business assets, after death. Wills, trusts, and estate planning are not enjoyable topics of conversation, but if you want your business to carry on with as few complications as possible and you want to make sure the people or organizations you love are taken care of, you should make time for it.
The first step in the financial planning process is to decide what your financial goals – personal and business – are. The next step is to tackle the above planning processes with the help of a financial planner. Investing the time and money into planning will help you achieve your goals and increase your chance of success – in your business and in life.