Americans are struggling to save for retirement. In March 2018, CNBC reported that many of those nearing retirement—people ages 55 to 64—had put aside only 12 percent of the $1 million that many financial experts recommend.
For small business owners, financial planning can be especially difficult. To help you get on strong footing, two NFIB members—William C. Larson, owner of Larson Financial Group LLC, and Darryl Lyons, cofounder and CEO of PAX Financial Group—weighed in with their advice on what small business owners should know.
Cash flow is one of the most critical differences between financial planning for small business owners and everyone else, Larson says. In fact, Lyons notes, many small business owners are behind in retirement savings because of cash flow crunches in the early stages of starting their business.
As a result, creating and monitoring cash flow projections and actuals is the single most important skill to develop, Larson says. “If the timing of receipts and cash are somehow out of sync with payroll, cost of goods sold, and taxes, the risk of closure increases,” he says. “Since the owner is paid last, it’s best to monitor smart cash goals using spreadsheet projections to stay afloat in business and at home.”
Another big difference in financial planning for small business owners has to do with tax decisions, such as writing off expenses to reduce tax burden and choosing how to compensate oneself. One thing to consider when making these decisions, Lyons says, is ensuring your business financials are accurate in the process.
“The temptation of running all expenses, such as cellphones and travel, through the business are attractive and should be considered,” he says. “However, by doing so, there’s a risk that the business financials won’t be accurate, which could hurt if a buyer is looking at them in an acquisition. Also, many times a business owner will pay themselves solely from company profits. It’s much more advantageous to pay a salary commensurate with the work provided, which will also provide accurate company financials for decision-making and merger/acquisition opportunities.”
Larson also recommends setting aside a percentage of the business’ gross revenue to pay taxes, as many businesses find themselves low on cash when these liabilities are due.
Debt always adds a degree of risk, Lyons says, but it can be especially complex for small business owners if they are infusing the company with their own funding in times of need. If this is the case, he says, the money must only come from above and beyond a personal emergency fund.
“By establishing a household emergency fund first, the pressure of not being able to pay the mortgage will be minimized,” Lyons says. “It’s very difficult to start or run a business when worried about paying the home mortgage.”
No matter when you plan to retire, consider your exit strategy early on. The most valuable part of a small business owner’s net worth is their equity in the business, Lyons says, so curb appeal—including an upward trend in revenue and profitability—must be developed at least five years ahead of your ideal retirement date.
In the same vein, Larson says, owners must be thinking about periodic, third-party valuations of their business. “Tragedies occur, and this best practice is an important step owners can take to take care of their loved ones and employees,” he says.
Finally, both Larson and Lyons stress, do not rely solely on your business as your retirement strategy—plan for the certainty of uncertainty by saving regularly in a retirement account or defined contribution plan as cash flow allows (15 percent recommended).