Money Well Spent: Financial Pointers for Business Owners

Pictured above: Pat Moon, certified financial planner and managing principal at Meridian Investment Advisors in Little Rock

People start businesses for all manner of reasons, from passionate to practical. Regardless of whether one is monetizing a hobby, making use of a skill or just striking out on their own after another career, the need to both make a profit and use it wisely connects every budding business venture.

For established companies and newbies alike, the first of the year is a great time to revamp and refresh business plans and financial strategies. While specific priorities may vary by industry, market, size and other factors, there are a few areas that most any owner should consider as they make their resolutions.

“Develop a detailed budget that outlines income, expenses and anticipated cash flow for the upcoming year,” said Pat Moon, a certified financial planner and managing principal at Meridian Investment Advisors in Little Rock. “A tempting shortcut would be to think you know your business well enough to manage your finances as you go, but projecting income and expenses for the year should be an annual planning activity.”

The budget’s place as a cornerstone of one’s business operations cannot be overstated. Taking a clear-eyed look at expected income and expenses ensures a solid start to the year at the very least, and knowing where the company ought to be at any given point can help owners set realistic benchmarks for growth and performance as the months wear on.

“A budget serves as a financial roadmap, providing a detailed plan for how a business will allocate its resources to achieve its goals,” Moon said.

Though they are far from the most thrilling lines on the balance sheet, expenses such as maintenance and repairs, emergency funds, taxes, and insurance play a critical role in the well-built business budget. Business owners also need to stay agile and ready to adjust the sails in case of unexpected challenges — mitigating risk ahead of time could mean the difference between a thriving business and a bankrupt one, Moon said.

Income fluctuations and out-of-the-blue expenses can happen at any time, so the prepared executive should have a decent idea of what kind of impact those obstacles can have on cash flow, revenue growth and cost control.

“It can be tempting when money is tight to put off today what might cost you tomorrow,” Moon said. “Plan for a financial buffer so you can weather unforeseen challenges.”

Besides a lack of financial forecasting, there are other mistakes that can plague the underprepared and overambitious business owner, especially when it comes to what to do with those profits once they’ve been made.

“A business may face financial challenges if it lacks liquidity or if profits are not effectively converted into cash flow,” Moon said. “If you don’t have training in the foundations of accounting, you need to involve someone in the business that does. Add an accountant to your team.”

Together with the mistake of overreliance on profits is overlooking one’s profit margins. Focusing solely on revenue without taking the time to review expenses and look for ways to cut costs is shortsighted, Moon said. As with a budget in general, shortcuts or assumptions around cash flow can come back to bite even the most successful entrepreneur. That is because a business with high revenue but low profit margins may struggle in the face of unexpected costs or expenses, which can make it harder to achieve long-term sustainability.

Savvy money management goes well beyond the first of the year, however, and there are several year-round ways to ensure one is maximizing the value of their resources, whether in the short or the long term. More immediate considerations include the careful management of payment terms, both with suppliers and customers, as well as the creative use of promotions and discounts to help manage inventory and provide a boost during slow seasons.

“Invest in employee training, [as well],” Moon added. “Enhance productivity and make your business more efficient. This can improve morale, help postpone the need for new hires and have an immediate positive financial impact.”

Larger projects, from keeping technology up to date to succession planning, can also be well worth the effort they take to implement. Improvements in areas such as customer relationship management systems, social media and web presence can further improve efficiency and help grow the business in the long term, Moon said. Paired with a carefully laid succession plan, investments such as these can set a founder’s business up to not just survive, but thrive well after they head off for retirement or their next big idea.

“A business owner should start thinking about their exit strategy early in the life of their business,” Moon explained. “Having a plan from the beginning can help guide business decisions that will maximize the value of the business in the long run. Details of the strategy will evolve over time, so it’s important to regularly review and adjust your plan. Starting early allows for a more thoughtful and strategic approach to the transition, providing the best chance for a successful and financially rewarding exit when the time comes.”

Still, it can be hard to think so far into the future when first setting up shop, especially amid all the excitement and challenges that come with any new business venture. Rather than being daunted at the road ahead, then, the newly minted entrepreneur would do well to focus on the fundamentals and set a solid foundation for sustained success.

“Develop a business plan,” Moon urged. “This is an imperative first step. Outline your business concept, target market, competition, marketing strategy, financial strategy and long-term goals. You’ll need this in writing if you want financing from a lender to get started.”

Key to this plan is a deep understanding of one’s market and potential customers, he added, as well as a working knowledge of compliance and regulatory requirements. This information can help one size up the competition, keep pace with industry trends and avoid the incidental fines — or worse — caused by a haphazard legal and regulatory approach.

Perhaps one of the most prominent mistakes an entrepreneur can make is mixing business with pleasure, and Moon cited both clarity and legality as reasons to keep personal and professional finances separate. However, he also noted a few ways in which the two realms can interact positively.

“You can sometimes leverage personal assets for business needs or vice versa,” he said. “For example, if you have a personal vehicle that you use for business, you may be able to deduct some of the related expenses. Maintaining a good credit score can make it easier to secure financing or credit for your business and paying your business, bills on time can help your personal credit score.”

Business contributions to a retirement plan are generally tax deductible and allow one to build personal assets that can be used after leaving the business, he added. Paying for health care premiums as a business owner can also confer tax benefits, but Moon again stressed the importance of having a professional weigh in before making any consequential decisions.

To turn those notebook scrawls and competitor intel into an actual storefront or factory floor, it takes a team of dedicated individuals working towards the best interest of the budding business itself. That group goes well beyond just employees and into the wide world of business services.

“Every business owner needs a team of advisors that should include legal, tax, investing, banking or other business experts,” Moon said. “Developing and investing in your team will help you avoid costly mistakes and improve your odds of success.”

In addition to help from those with billable hours, business owners should not overlook the invaluable advantages that come from fostering industry relationships. Networking with other entrepreneurs, finding a mentor, and attending conferences and events are essential, and Moon pointed out that a strong network can lead to valuable partnerships and business opportunities down the road.