There are a few similarities between business and personal financial planning — besides the fact that both they’re very wise things to do!
Both involve balancing the books. Businesses and individuals alike have to watch income and expenses, set budgets, and get a clear view of what to spend and when to save.
Both types are goal-oriented, both for the short and long term. A business may have plans to expand, while an individual may be preparing to make a major purchase. Solid financial plans are crucial to both.
But financial planning for a business includes several functions that individual wealth planning doesn’t. The scope and variables of business require attention in key areas. Even if the business is extremely small or simply a form of self-employment, financial planning must take a broader view.
So while financial planning is a valuable endeavor for all entities that handle money, financial planning for business has unique and plentiful considerations that require a distinct approach. Here are five of the most significant differences.
Both business and personal financial planning revolve around investment strategies, especially diversification of holdings. But business planning adds another element to the mix: reinvestment.
The challenge for businesses is to expand and grow. Success is characterized by opening new locations, generating new revenue streams, and broadening market or customer bases. All of these functions require a business to put capital back into its operations, an action that’s not typical of personal finances.
Reinvestment must be an integral part of financial planning for a business. This factor by itself is the most significant difference.
Without a carefully reasoned valuation of its market worth and projections, it’s hard for a business to construct a solid financial plan. This is true with personal finances to a certain extent, but there are many more revenue and expense funnels to consider with business planning that make it a more significant task.
Business valuation usually includes the help of an outside consultant, working in tandem with a company’s team of accountants to come up with an authentic dollar value.
There are also some methods that business owners can use on their own, such as comparing the financial worth of similar companies and analyzing discounted cash flow.
At least in the earliest years of its existence, a small business tends to have a binary view of success or failure: do or die. Risk management at that stage is primarily just about survival. But even at that early phase — and definitely if the business continues to grow — risk management takes on several forms.
A company’s success or failure is affected by a host of factors and events. Many of these things are unforeseeable. That’s why business planning needs to account for insurance and manage risk across multiple areas, including employee health, partnership liability, workers’ comp, natural disasters, company vehicle coverage, and so forth.
Taxes play a big (and not entirely welcome) role in personal finances. But at heart, it’s only about a couple of taxation avenues at the federal and state level: personal income tax and, for landowners, property tax.
Businesses, however, have far more tax categories to deal with on top of income tax. Employment or self-employment taxes, sales taxes, estimated taxes, and excise taxes are all ways in which taxes may be levied for a business. They’re also subject to oft-revised rules and regulations.
Taxation is a critical part of business financial planning. Small businesses need to itemize as many deductions as they legally can and plan for potential taxable events. These efforts can help to keep a business in compliance down the road and make audits slightly less painful.
All business owners will, at some point, no longer own their businesses. Some will retire and sell the company to a third party. Some owners will pass their business down to family members or partners. Some will go public with their companies and divest their holdings. Whatever the case may be, there will need to be an exit strategy in place.
Financial planning is the most critical part of that exit. A disorganized or sudden departure can have a devastating effect on everyone still involved. In the case of a sale, there are plenty of matters that need to be handled responsibly. Money is part of each of those issues.
Any liquidation or succession event needs to be organized and outlined in financial terms.
Good planning helps owners realize profits and limit losses when it’s time to move on. It can also set them up to have a rewarding and comfortable retirement.