Financial Health Checklist for Small Business Owners

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Written by: Caroline Wetzel | Procyon Partners

If any of your clients are small business owners, you know that the daily decisions they make impact their bottom line. Are they exercising the same care for their finances that they apply to the services they offer their customers?

Following is a checklist you can use to help your clients evaluate their financial health as a small business owners.

Are They Focusing on the Big Picture?

There are many pieces to a small business owner’s total financial picture. Their financial plan, budget, and investments are three critical components to keep in mind no matter how busy daily operations become.

1. Financial Planning

Taxes can be one of the most significant expenses for business owners. In order to identify and follow the most appropriate tax planning strategies, small business owners need to be clear about both their business goals and personal financial goals.

Do they:

  • Maintain a prioritized list of business and personal financial goals and refer to it when they need to make new decisions?
  • Have a small business structure that offers them the most appropriate legal protections and benefits?
  • Reduce or defer taxes and maximize available deductions and credits? This may include timing income and expenses, using charitable gifting, and saving for retirement.

2. Budget Management

82% of all small businesses that fail cite cash flow problems as the primary reason. One way to identify such challenges before they become lethal is to manage a budget according to your business plan.

Do they:

  • Know how much revenue they must generate to break even and cover expenses before profits?
  • Monitor their income, expenses, inventory, credit, and cash regularly, adjusting and rebalancing where required so they cover their fixed expenses and maintain funds in their cash reserve?
  • Use their nbudget, break-even point, and cash flows over time to evaluate their business financing options and identify the ones that make most sense for them, when financing is required?

3. Investments

Many small business owners mistakenly invest all of their time and money into their business.

Do they:

  • Maintain a cash cushion for both their personal finances and business needs, so that if they run into a cash flow crisis they have something to access?
  • Save regularly and invest any cash inflows that exceed their current expenses and immediate lifestyle needs into an account outside of their business?
  • Diversify their non-business investments across companies outside of their industry, in different geographies offering services that vary from theirs?

Are They Protecting What They Have?

Many small business owners wisely purchase insurance to protect their assets from risks unique to them.

Do they:

  • Understand the types of risks that you face in their small business?
  • Own insurance and regularly review it to minimize the impact of their business risks, if they should happen? Examples of insurance that is helpful to small business owners include:
  • Liability insurance
  • Property insurance
  • Business interruption insurance – for lost income and overhead expenses during a disaster
  • Life and disability insurance – for employees as a fringe benefit and/or for business purposes like funding a succession plan, in case there is a loss of a key person, or collateral for a loan
  • Worker’s compensation insurance – for businesses with three or more employees
  • Health insurance

Are They Keeping the End in Sight?

Even if they can’t imagine life without running their business, it is essential to think about what would happen if they could not manage it due to disability, retirement or death.

Do they:

  • Have a business succession plan that considers:  (1) an individual who has the skills, authority, and interest in running the business and (2) how the transfer might take place? If they plan to sell, do they know how their successor(s) will obtain the funds to assume ownership?
  • Maintain a retirement plan? Depending on the plan they own, they may be able to reduce their tax obligations today and benefit from tax-deferred growth on the money they save in their plan. A variety of retirement plans are available, from SIMPLE and SEP IRAs to individual 401kand profit sharing plans.

Related: 4 Tips For Teaching Financial Literacy To Your Kids

Caroline Wetzel is a CERTIFIED FINANCIAL PLANNER (CFP®) and Vice President at Procyon Private Wealth Partners, LLC. Procyon Private Wealth Partners, LLC and Procyon Institutional Partners, LLC (collectively “Procyon Partners”)