As you grow your business, it’s imperative for you to have advocates in your corner who understand the pitfalls that are common to newer, rapidly-growing organizations. From risk exposure and tax planning to the construction of retirement plans, entrepreneurs often face challenges that are outside their comfort zones. Each member of the team at Magellan Financial can provide fresh perspectives through professionally-trained eyes.
Above all, as financial advisors and small business owners, ourselves, we realize the importance you probably place both on retaining control over your personal and professional finances and for building a legacy of which you can be proud. With that in mind, there are many ways we can add value to your business, including identifying frequently encountered opportunities for improvement such as those detailed below.
1. Not Paying Themselves First
It’s natural to want to plow all of your profits back into the business. After all, that might be how you got here: by seeking to “pyramid your profits” so that you can build them even higher. However, this can be a mistake for a couple of reasons. First, paying yourself last jeopardizes your personal financial future. You and your family deserve a solid foundation and the confidence that comes from a wage that’s commensurate with your skills and expertise.
Second, besides IRS requirements that you pay yourself a fair, competitive salary, banks and lenders want to see a thriving business. When you need funding for expansion you want to show that your entire financial house is in order, and that includes a solid CEO salary. Pay yourself first. Your future self (and CEO) will thank you.
2. Eschewing Low Interest Rates and Depreciation
The share price of a company has more than doubled in the past year and its managers run a highly profitable line of businesses. (1) The company also recently issued $14B in debt, adding to the $112B it already had on its balance sheet at the end of last quarter. Why? Because the c-suite at the company understands the value of borrowing when interest rates are low to fund its future capabilities.
In our experience, small business owners often have an aversion to debt. They often self-finance most start-up costs and business operations. By doing so, they miss out on the potential for long-term growth. Debt can lower your personal financial risk and allow you to take advantage of beneficial tax laws. Of equal importance, smart debt can help you push your timelines forward as you buy newer equipment and capabilities before some of your competitors.
3. Committing Too Much Cash Flow to the Wrong Areas
When entrepreneurs establish their new businesses, the tendency can be to try to replicate aspects of the larger, more-established companies from which they learned their trades. This can mean anything from leasing an office space that’s as nice as the ones they’ve left, to buying the latest technologies or hiring only the employees with the most impressive resumes.
While smart borrowing to expand and improve operations can make sense, committing a large portion of your revenues in the wrong areas can reduce your flexibility. You want to avoid the expense bloat of the larger firms. Be as lean as possible in the early years, spending money wisely in the areas that directly help you build and deliver on core competencies. This will help you weather tough times and increase the free cash flow which will be your company’s lifeblood.
4. Failing to Protect Against Potential Loss
As with any type of insurance, business insurance is something that you hope you never have to rely on but which protects you against major loss. Unfortunately, 44% of small business owners have never purchased business insurance, exposing entrepreneurs to major financial and operating risk. (2) By purchasing the right types in the right amounts, you can protect your company’s assets against damage and legal claims and better safeguard continued operations. Because of the number of options, many small business owners just throw up their hands when they start investigating business insurance. It doesn’t have to be this way.
When we talk about the topic with clients, we look at their complete personal and business portfolios and risk profiles. General liability and commercial insurance speak for themselves. But depending on your corporate structure and industry, you may also benefit from a Key Person policy (replaces lost income from an owner or key executive’s death or disability) or Professional Liability coverage (protects against financial losses arising from negligence or malpractice). (3) Talk to a professional at Magellan Financial to get the guidance you deserve.
5. Not Having a Succession Plan
As a small business owner, you have spent an immeasurable amount of time and energy to create a profitable, healthy enterprise that will last for years. But, have you specifically considered the future of your business without you? Whether retirement is far off in the distance or quickly approaching, you must seriously think about how your enterprise will continue to function after you leave. Unfortunately, succession planning is not an action that is often taken. A recent article from the National Federation of Independent Business cites a FPA/CNBC survey, noting that merely 30% of small business owners actually create concrete succession plans. (4)
In order to complete unprecedented tasks in your industry and increase the value of your business to certain levels, you should create milestones far in advance of when you hope to accomplish them. A proper succession plan is necessary to ensure that your employees and assets continue to grow to reach those goals. It can also increase the attractiveness of your business and make it easier for you to exit via a sale, should you desire to do so.
6. Not Putting Professionals in Your Corner
New challenges often accompany professional success. And growing a business requires new capabilities and resources for employees, from 401ks to insurance — and more. No one, not even the most talented people, can do it alone. Consider putting trusted professionals in your corner to allow yourself to devote your limited time and energy to doing the things that you do best.
A financial advisor can help you navigate all of these challenges and keep your professional goals a priority. He can tailor a wealth plan that fits your entrepreneurial mindset and a portfolio that aligns with your business needs. An advisor can also help you set-up benefits for employees and protect against emergencies and loss. And when you’re ready, a financial advisor can help turn your business into a family legacy or help you transition from the business, and into retirement.
Wells Fargo Advisors Financial Network and its financial advisors provide non-fiduciary services only. They do not provide investment advice [as defined under the Employee Retirement Income Security Act of 1974 as amended (“ERISA”), have any discretionary authority with respect to the plan, make any investment or other decisions on behalf of the plan, or otherwise take any action that would make them fiduciaries to the plan under “ERISA”.
Wells Fargo Advisors Financial Network and its affiliates do not provide legal or tax advice. Transactions requiring tax consideration should be reviewed carefully with your accountant or tax advisor. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.