A generation ago, the American dream consisted of home ownership, steady employment, a well-rounded network of family and friends close by, and, not surprisingly, financial stability. While some of the aspects of the ideal life have not shifted too far from the traditional center, another life goal has entered the playing field with force.
Being able to say you own your business, work for yourself, set your own hours, and develop your own company culture is a powerful, pride-fueled moment for most people who take the leap into entrepreneurship. And because of this, it is no surprise that thousands of new business owners join the ranks of entrepreneurs each year. In addition to a sense of accomplishment, part of the influx in small business growth over the last 10 years can be credited to more accessible funding from a myriad of sources. Similarly business owners have more access to the tools necessary to create and sustain successful companies. Establishing a business to call your own is not as far-fetched as it may have been a few decades ago, but challenges related to balancing personal and business needs remain for business owners and their families.
With every available moment – and available dollar – infused back into business operations, whether it be for growth, maintenance or sustainability, entrepreneurs quickly lose sight of their personal planning needs, especially in the realm of long-term financial well-being. According to a survey conducted by the Financial Planning Association in conjunction with CNBC in 2014, only one third of business owners place as much importance on personal financial planning as they do planning for the business. The same business owners shared that they experience a lack of confidence in their personal financial state of affairs, while simultaneously giving their business high marks in the same category. This speaks to a clear separation between the need for business and personal planning.
Whether you are new to the business owner universe or are an old pro, there are planning aspects you should consider to create a personal financial plan that is as successful as your business.
Transferring risk to a third party through insurance or choosing to self-insure with assets on hand is a decision business owners make shortly after operations begin, if not before. Personal protection, however, is often set aside for another day and another time. For most business owners, that “tomorrow” rarely comes. However, risk management in personal financial planning should be at the top of an entrepreneur’s priority list.
The transfer of risk is most commonly structured through the use of insurance policies, covering a wide range of financial losses due to death, disability, illness or liability (beyond what is covered through business insurance). Business owners often think they are covered through the protections in place for the company they own, but in most cases, individual coverage is necessary to fill in what are often costly gaps. In order to keep the business afloat, the family fed, and personal bills covered, disability, life and liability insurance coverage are a necessity for an entrepreneur.
According to the FPA/CNBC study, over 70% of small business owners have the majority of their wealth tied up in business assets. While this represents a dedication to ongoing successful business operations, this investment structure can lead to devastating results for the business owner over the long haul. The investment principle of diversification is incredibly important for business owners to follow, and that means utilizing earnings from operations to invest in assets outside the business. Real estate, stocks, bonds, and pooled investments may prove to be beneficial holdings over the years, as they act to stabilize and, at times, offset disruption in business valuation or earned revenue. In the unfortunate case of a small business being unsuccessful, an entrepreneur may have little to show as a return on his or her investment of time and capital if assets are not diversified outside the business.
According to the Financial Industry Regulatory Authority (FINRA), it is not uncommon for individuals to need between 70 and 90% of their pre-retirement earnings to sustain a similar lifestyle during retirement years. For some entrepreneurs, owning a business takes the place of their personal retirement savings. While successful business endeavors have the potential to payoff substantially over time, either due to the sale of the business or liquidation of business assets, most small businesses do not provide enough return on investment for business owners to retire comfortably.
Compounding the pressing retirement savings issue is the fact that individuals are now living longer, creating the need for even more of a nest egg to draw from once the ability or desire to earn an income is no longer feasible. Fortunately, business owners have the ability to choose from a number of retirement plan options that can be established individually or through the business. For plans created under the umbrella of the company, business owners not only establish a way to save for retirement, they also create an avenue for tax savings for the business each and every year contributions are made.
The final area where business owners fall short in terms of finding balance between personal and business planning is estate and succession management. Oftentimes, entrepreneurs have no desire to think about handing over the keys to their company to someone else, let alone what may happen to the business if he or she should pass away. However, each of these are realistic concerns for both business and personal financial planning. Without an estate plan, the business could end up being sold off or liquidated in a way that doesn’t benefit the business owner’s heirs. Similarly, a company without a well thought out succession plan could experience the same fate, with little to no recourse from those who anticipated taking the company reigns.
Care for Yourself and Your Business
For any business owner, a work/life financial balance can exist, but it takes time and effort to create and sustain it. Entrepreneurs should spend as much time planning for their personal financial goals as they do for their business objectives, and should take care to ensure the two fit together seamlessly. To maintain a smart balance between your business and your finances, consider taking the steps to plan for the management of individual risk, diversification of your investments, creation of a retirement plan, and development of an estate and success plan. Each of these aspects are critical to the success of your personal financial plan, and the long-term sustainability of your business.