Financial planning for business owners
It is everyone’s dream to have their own business. Investing so much time, effort and money into a business is scary and that is why you need to have a financial plan.
The first question you want to ask yourself is: where do you want your business to be in 2, 5 and 10 years’ time?
If you want to have a solid financial plan for your business and you have decided what your goals are, here are some useful tips in preparing a financial plan:
1) Budget, budget, budget. Without a budget, you do not know if you are achieving your goals and if the numbers make sense. The most important budgets to prepare are profit and loss budgets as well as cash flow budgets.
2) Do some business structure planning. A lot of people think that it is a good idea to have lots of different entities in their business structure. Make sure you understand the purpose and goals of these entities and prepare a financial plan for these entities. Using intercompany accounts can be tricky and it might not have the benefit you were looking for.
3) Do some tax planning. Make sure you make tax planning the first thing you do when you do business structure planning. A lot of people have many intricate business structures in place and all they are doing is making it more difficult to get the tax benefit. i.e. Small business corporation tax is a tax on businesses where the owner only has shares in one entity. If you own more than one business (that you aren’t using), you can’t enjoy the benefit of this lower tax rate.
4) Decide what you want your balance sheet to look like. It sounds weird, I know, but if you are in the service industry, you will not have a lot of assets except for the computer equipment, cash in bank etc. Perhaps you want your business to acquire extra investment assets i.e. property rental or you need to buy a motor vehicle and you need your liquid assets to be higher to show that your company is good for it. A lot of people come to me and say they need their financial statements asap to acquire an asset, but as soon as those financials are prepared, they realise it does not look good at all because all the profits have been drawn out of the business making the profits very low and there are no assets to strengthen the balance sheet.
5) Think about what are valid business expenses and what is an expense that is put through the business to lessen the profits. If you want to sell your business, it is not a wise idea to artificially increase your expenses just to pay less tax.
6) Write a business plan. A financial plan is nothing without a business plan. Where is your business going? Why is it going that way? Your budget all depends on expected expenditure, revenue and cash flow forecast etc.
7) Constantly review your financial plan. Remember this is your map - your recipe, if you must. Change the financial plan if you find that things are getting outdated or not applicable anymore. IT IS OKAY to change your mind because you are human and humans grow as their business grows.
8) Speak to as many people as you possibly can on how they did their financial plan, financial budget and business plan.
9) Get industry-specific reading material.
The most important thing is to enjoy yourself!