Those that are successful in their small business are generally smart, hard-working, tenacious, and extremely focused. They have no choice but to be. According to a Dun & Bradstreet study, those businesses with less than 20 employees generally have a less than ten percent chance of surviving a decade.
And even when it comes to people who have business success, it isn’t all that uncommon for them to fail at their own financial planning. They are so focused on their business that they essentially neglect personal finance.
For example, a husband and wife are owners of a highly profitable seasonal business. We worked with them in the early stages and ultimately, they built a successful company with revenues in the millions. Their focus was on the business 24/7 as they consistently updated, upgraded the facility, searched the globe for inventory, you name it. But when it came to personal finance, they had little saved, a scant amount for both retirement and kids’ college and their benefits package was definitely not where it should have been.
Flash forward, and now they have taken out more than one million and invested in a diversified portfolio. They’ve also started a profit-sharing plan for the business. And consequently, they have life insurance, disability, a 529 and are investing in retirement. Many small business owners are in the same position as they neglect personal finance. You have to be prepared to make some changes. Below are some of the more common mistakes that successful entrepreneurs make which can detrimentally impact their financial future.
- They don’t have proper benefits, to include health, life and disability insurance, and retirement plans. This is an all too common problem with small business owners. In the beginning of a business, benefits tend to be something of a low priority. Costs may be prohibitive. As the business grows though, the topic of benefits is still generally left to the wayside. When it comes to retirement planning, small business owners do have options available to them. There are even some that are flexible to accommodate cash flow fluctuations.
- Their families are not provided for should the unexpected occur. Disability insurance isn’t usually a top priority for small business owners. They believe that if, especially, their business is profitable, the family will thus be provided for should something happen. However, they fail to consider that without them, the business is likely to be worth far less. So how much insurance should you get? There is no hard and fast formula to follow as far as insurance goes. Not all people require the same amount of life insurance. It’ll likely depend on your life stage, your family’s needs and your obligations.
- There is no money saved outside the business. Small business owners tend to pour most if not all of their earned money back into the business in order to help it prosper and grow. Ultimately though, they may end up with nothing to show for it should the business fail. And so inevitably some work even into their 80s. They need to be drawing sufficient cash out. Additionally, money needs to be invested when they are profitable into retirement plans and a diversified overall portfolio. Of course, you don’t want to suck the business dry, but also you don’t want all of your eggs in a single basket (i.e., the business).
- They fail to establish business credit as soon as possible. Also, keep in mind that because of this, many fail to establish proper financing and so what happens is that they have to rely on personal credit in order to get business loans. Without proper financing, businesses have difficulty growing, unless of course the owner continuously sinks money into it, which endangers their personal finance. Try and get a line of credit early on and thus establish business credit. Paying on time can show you to be less of a risk and so more lenders will be willing to work with you.
- There is no definitive succession plan or exit strategy. If you’ve spent years building your business and have no succession plan or exit strategy, then you may be in a situation where you’re left wondering: “What am I going to do with my business?” At this point, it is probably too late and the business will go under as without you there is no value. You should have a plan in place at least five to seven years prior to retirement. Where would you like to see your business go? Is a family member a viable option? You might also sell to a competitor. Finding someone who is willing to take over the business can be a difficult process not to mention they have to be capable of doing so. So many companies are literally run into the ground by family members with good intentions and yet lack the necessary knowledge and skills. Business owners need to be thinking about tomorrow, about their future. They also need to keep an eye on their personal finance so that they don’t have to work all of their lives. Your eye should always be on the finish line.