Four Big Financial Planning Mistakes Business Owners Make - Replay

My name is Brian Scribonia and on this episode of the Common Sense Financial Podcast, the fear of missing out or FOMO can also lead to poor cash flow management. Entrepreneurs may be tempted to seize every opportunity that comes their way without considering its compatibility with their business vision. Without a clear financial plan, these impulsive decisions can steer the business owner off course and hinder its long term growth.

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There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonia. Thanks for tuning in and let's get into today's topic. Lax Financial planning when it comes to taxes, risk management, exit plans, and cash flow can hinder the growth and success of your business. Many entrepreneurs find themselves underserved when it comes to financial planning. They often rely too heavily on their CPA for financial advice, and that's primarily due to the close working relationship that exists between business owners and their bookkeepers. As someone who has been running businesses for the last 30 years, I've witnessed firsthand the void that many business owners have in terms of financial planning. Entrepreneurs, by nature, are continuously occupied with running their business and wearing multiple hats throughout the day just to keep things running smoothly. Consequently, they may overlook the importance of having a financial plan and instead manage things on the go. However, this approach is not recommended considering the significant time, money and effort invested in a business. One common mistake entrepreneurs make is assuming that as long as they meet payroll, stay current on taxes, and receive payments from customers, their business is financially healthy. And of course, while these factors may be important from a CPA or bookkeeping standpoint, they do not necessarily address the broader concerns of having a financial plan CPAs play a vital role in any business by ensuring compliance with IRS requirements. However, what I often find is that most CPAs primarily focus on looking backwards, reviewing the previous year or quarter to meet tax filing deadlines. Financial planning, on the other hand, is more of a forward looking process aimed at reducing tax liabilities, of course, but also finding ways to increase the value or the capabilities of the company. For example, how companies profits are distributed to business owners is an essential consideration for potentially lowering taxes. Many business owners mistakenly take their profits entirely as income, which may not be the most tax efficient method of distribution. Proper planning can help strike a balance between income and profits as the owner of the company. Moreover, choosing the right tax structure for your business, such as an S Corp or C Corp, is a commonly missed opportunity to manage tax liabilities effectively. Entrepreneurs often adopt a certain structure early on and then neglect to adjust it as their company evolves. Proper planning can help determine the most suitable structure not only for tax purposes but also for long term sustainability. Another critical aspect of financial planning that entrepreneurs tend to overlook is their risk assessment. Running a business comes with inherent risks, of course, and they can vary from one company to another. However, there are three major risks that can potentially devastate a business overnight if not addressed, and that is death, disability, and divorce. In the case of a business partner, many businesses rely heavily on the individual owner or a small group of key individuals who drive the company's success through their vision, leadership and hard work. If these individuals are unable to fulfill their roles due to death or disability, the business can suffer significantly. Negative consequences may include employee and customer attrition, family disputes, partnership divorces, and cash flow problems. As part of a comprehensive financial plan, risk can be mitigated or transferred to an insurance company through appropriate coverages for death or disability. Furthermore, when launching a new business or forming a partnership, entrepreneurs often visualize positive outcomes and sometimes neglect to consider that things can derail their vision. However, having a financial plan can include agreements and other triggering events that can help facilitate a smooth outcome when facing such events. Another common mistake made by business owners is treating the business exit as merely a transaction rather than a transition. Exiting a business involves more than just the sale itself. It requires planning for life after the exit. Neglecting post exit planning can leave business owners unprepared for their financial and personal futures. When contemplating the sale of business, the owners frequently overvalue their business, leading to unrealistic expectations regarding the outcome of the sale. So it's crucial to obtain an accurate valuation from professionals to set a realistic asking price. Additionally, many business owners underestimate the time and effort required to prepare for a successful exit. The truth is, it is natural to have emotional ties to a business that can sometimes drive behavior and clouds judgment. Preparing for a sale can take years of planning if done right and should be incorporated into an overall financial planning process. The importance of advanced planning and preparation cannot be understated. Consideration should be given to your financial well being as well as your personal goals beyond the business. Avoiding these mistakes with the help of a professional team of advisors can help improve the chances of a successful business exit and help ensure a smooth transition into life after business. Managing cash flow is another vital aspect of financial planning that entrepreneurs should prioritize. It is essential to align the handling of cash inflows and outflows with the long term vision for the company. One common mistake is succumbing to the pressure of spending money to avoid tax liabilities. While tax planning is essential, it should not be the sole driving factor behind financial decisions. Entrepreneurs should remember that the primary goal of their business is to build value and generate revenue. A well designed financial plan keeps the business owner focused and enables them to evaluate opportunities based on their alignment with the overall plan. Moreover, the fear of missing out or FOMO can also lead to poor cash flow management. Entrepreneurs may be tempted to seize every opportunity that comes their way without considering its compatibility with their business vision. Without a clear financial plan, these impulsive decisions can steer the business owner off course and hinder its long term growth. To ensure effective cash management, entrepreneurs should establish a strategic cash flow strategy that aligns with their business objectives. This process involves forecasting and maximizing their cash flow, identifying potential gaps and understanding their opportunity costs to make informed decisions about how to hold and use their cash. By having a well defined cash flow plan, entrepreneurs can allocate resources, efficiently reduce financial stress and build wealth inside and outside of their business while helping to maintain stability during both prosperous and challenging times. A cash flow strategy is an integral part of an overall financial plan. It acts as a roadmap, guiding financial decisions and helping you make the most of the cash flow you have flowing through your business. Don't let inadequate financial planning hinder the growth and success of your business. Take the necessary steps to avoid these common financial planning mistakes and secure a prosperous future for your entrepreneurial venture. By seeking expert advice from professionals experienced in financial planning for entrepreneurs, you can gain valuable insights and ensure that your financial plan is designed to help you maximize your available resources. To learn more about how to avoid these mistakes and to begin maximizing your cash flow. You can visit my website@Brian Scribonia.com and download the Cash Flow Guide for Entrepreneurs. That concludes today's show. I'm Brian Scribonia. Thanks for listening to the Common Sense Financial Podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia and this is the Common Sense Financial Podcast.

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