Financial Planning for Business Owners

Financial planning is important for everyone, but more so for business owners. When running an enterprise, you must have an actual income expenses and investments plan.

Financial planning for small business owners is more challenging because of the overlap between personal and business financial goals. A financial planner can help you create and implement appropriate strategies to reach business and personal financial success. Learn the significant aspects of business financial planning and how you can strategize for financial success.

What Is Small Business Financial Planning?

Most small business owners will drain their savings and throw themselves entirely into running their business. For this reason, it's harder to separate their personal finances and business finances.

Creating and executing a solid business and personal financial plan separately can help you draw boundaries and ensure that both aspects of your life run smoothly. This way, you can objectively assess the medium and long-term viability of the business and make changes where necessary.

Business financial planning is the process of addressing the personal and business financial goals of a small business owner: allocating resources, creating tax strategies, managing expenses, and planning for business investments (e.g., business 401k) and retirement/estate planning. Once the strategies are documented and implemented, the financial planner can help you assess progress and make adjustments.

How Do I Set Up a 401k for My Business?

A business 401k plan is one of the first things to think about when your business gets its first employee. Most states don't require employers to have retirement plans – check your state requirements. Still, most employers will have a retirement plan of some sort for these reasons:

  • It demonstrates your commitment to your employees' wellbeing
  • It maintains competitiveness so that you can retain the talent you acquire
  • It saves taxes – your business 401k contributions are tax-deductible

There are several steps to setting up your business 401k plan. These are:

Step 1: Choose Your Plan

Businesses can choose from three common retirement plans: SEP-IRA, SIMPLE-IRA, and the traditional 401(k). You must decide which plan to set up. For example, the traditional 401(k) is better suited for businesses with over 100 employees; below that, you will choose between SEP-IRA and SIMPLE-IRA.

What is SEP-IRA, and how does it work?

The Simplified Employee Pension (SEP-IRA) is ideal for self-employed individuals and small business owners. Only employers can contribute to this IRA and not employees. In 2021, the requirement was to invest the lower of $58,000 or 25 percent of income.

What is SIMPLE-IRA, and how does it work?

The Savings Incentive Match Plan for Employees IRA is a plan for small businesses (less than 100 employees). It's named for its simplicity – you fill a form, make contributions, and that's it. By 2021, it required investments of $13,500 for employees below 50 years and $16,500 for those above 50 years.

Step 2: Determine the Policy Details

401k plans are extremely flexible, meaning you can decide details like vesting schedules, matching and profit-sharing breakdowns, other perks, and eligibility requirements. Decide what you want to get from your plan, and your financial planner can help you bring it to life.

Step 3: Choose the Provider and Trustee

Once you have a plan, you can research different providers and pick the one that suits your needs. Choose someone who will handle the records and daily administration so that you don't fall out of compliance.

The law requires you to have a separate trust account for the 401k plan assets. The trustee collects contributions, invests them, and ensures monies reach the plan members or beneficiaries.

Step 4: Document the Plan

The IRS demands a written document to serve as the go-to manual for the daily operation of the business 401K plan. Once you have the plan, you should onboard the employees to understand their roles.

Tax Planning for your Small Business

Financial planning for business owners must include comprehensive tax planning. Tax planning is the process of organizing your business and personal finances to ensure tax efficiency. Compliance reduces liability from unexpected fines and allows you to generate more income.

What are the 3 basic tax planning strategies?

There are various tax strategies that businesses can employ, such as:

  • Querying tax status–your business structure determines your tax obligations. If you've outgrown your structure, it's essential to change to one that works better to reduce your liability
  • Leveraging tax reforms–you should know which reforms affect the taxes you pay and what to do to take advantage of tax breaks. For example, following the pandemic, the government rolled out several coronavirus tax relief measures
  • Accelerating or deferring incomes–if you use cash accounting (reporting expenses when cash changes hands), you can defer or accelerate incomes to reap the greatest tax savings

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