Healthy personal finance tips for the small business owner

Small business owners often wear many hats within their companies to keep things running smoothly. In doing so, their personal finances may not be getting the attention they need. Maintaining healthy personal finances is as important as maintaining healthy finances in business. To help entrepreneurs achieve financial balance, Kevin McCormick, Vice President & Business Banking Relationship Manager, and Lauren Luongo, Business Relationship Manager, share some tips on what every small business owner should focus on as one year closes, and another begins.

Every business owner’s Top 3 Pros

While entrepreneurs are often accustomed to doing it all, there are times when it’s important to consult with financial and legal professionals. There are 3 trusted professionals every business owner should rely upon throughout the year:

1. Banker
2. Certified Public Accountant (CPA)
3. Attorney

These professionals will play an important role in assessing finances — business and personal — throughout the year.

When it comes to financial planning, go long!

“Business owners are so busy that sometimes they only look at the short-term, and focus on what they need to do right now,” Kevin said. However, focusing on the short-term is really short-sighted. “Many times they forget about retirement and succession planning, or if they do think about those things, they’re not a priority. They’ll work on it later.” While common, this isn’t a good strategy. “It’s never too early to start saving for retirement and making a succession plan,” he said. With plans in place, business owners are better prepared for life events and changes in the economy.

How to make it happen

Just as every business is unique, every retirement plan is also unique. There’s no golden rule when it comes to how much a business owner should be saving for retirement, but consulting with a banker and/or accountant can be helpful in figuring out how much to reserve. The most important thing is to just start saving something, even if it’s a modest amount at first. “Whether you’re putting $5 away per pay check, or $300 per pay check, do whatever is affordable for you at the time,” Kevin said.

Choosing the best retirement plan

When it comes to retirement plans, there are plenty of options for business owners depending upon their number of employees. The two most common are Traditional and Roth IRAs:

• Traditional IRA – Contributions can be deducted from taxes, but withdrawals made later are taxed.
• Roth IRA – There are no deductions upfront, and no taxes later.

Business owners may also want to consider:

• SEP IRA (Self-employed Pension) – The most common type of IRA for those who are self-employed, the SEP IRA is typically less costly than some other plans, and it’s easy to set up.
• 401K – A tax-qualified, defined contribution pension plan, there are two types of 401K plans: the SOLO 401K (for sole proprietors) and the SIMPLE 401K (for those with multiple employees).

For those who want to keep things really simple, open a savings account and earmark those funds for retirement. Just be sure to keep these funds separate from any emergency fund. Bankers can mark each account so they’re easy to distinguish.

Kevin recommends consulting with a Banker and a CPA to determine which plan is best. Bankers can present options, and help establish the accounts. CPAs can also discuss options, and offer the added advice about tax implications. “Start with your Banker. We can tailor certain things to fit the business owner’s needs, and reduce costs or return.” Then, discuss the options with a CPA. The bank will provide the service, and the accountant will advise on tax implications. Consult with both to make the best decision on an appropriate retirement plan.

Retirement planning, succession planning go hand-in-hand

What is succession planning? A succession plan outlines what will happen to a business when the owner retires, or if the owner will no longer operate the business due to a life event. Some business owners will pass their company onto their children. Some will sell the business. Others may dissolve the business and close it.

“At the end of the day, there are always tax implications,” Kevin said. “If you sell the business, there are tax implications. There are tax implications if you pass it on, and if you close your business, you need to consider what you’ll do if you don’t have a retirement fund. Retirement planning and succession planning really go hand-in-hand.” In most cases, retirement will not only affect the business owner, but it will have an impact on their spouse and possibly children, employees, and investors. “There are a lot of things that come into play at this point, and you always want to protect the people that surround you and your business. A succession plan is part of that. It will help you, and it’s never too late to put one together,” Kevin said. “Many times, self-employed people think their children are going to take their business over, and then their children decide to do something else, and now they don’t have a plan. So it’s always good to talk to your accountant and your attorney to determine what the best steps are, how to maximize your value at the time of sale, or if you’re just going to close the business, what you need to do to make sure there are no tax implications lingering at the close-out of the business.”

Separate business, personal funds

New entrepreneurs should work with their Bankers to establish separate personal and business accounts from Day 1. Established businesses that don’t have separate accounts should make this a priority for 2020. Lauren explained why.

“There are a lot of tax implications and legal benefits to keeping your business and personal accounts separate,” she said. “Keeping them separate reduces your legal liability and it can help you manage your tax and business bills more efficiently. Establishing an LLC, a C-Corp, or S- Corp, will make their lives a lot easier, and a lot of business owners have family and assets they want to preserve if they ever get sued. Keeping the business credit card separate, the checking account separate, and even paying yourself a salary, is really important. I know it sounds like an extra step to write a check from your business account to your personal checking account, but it’s a necessary move that makes everything more clear and easier to follow come tax time.”

Business owners should consult with a CPA to determine if it’s best to pay themselves a salary, or take a distribution. One option may be better than the other depending on the type of company, the company’s profits, and what tax bracket the company is in.

4 ways to stay on track in the New Year

A new year means new opportunities. To start 2020 off on the right financial footing, here are few things every business owner should keep in mind:

1. “We don’t know where our economy will be in 2020, and things can change pretty rapidly. Having a vision for the year and budgeting properly for it the best you can is very important for 2020,” Kevin said.
2. Contingency/ER fund. Every business owner should have a little nest egg in the event something comes up, such as losing a large client, or experiencing an increase in the cost of raw goods, or tariffs on international items.

3. Review current financing to ensure it’s in place properly. “Interest rates have been on a roller coaster lately, so it’s good for business owners to take a night and sit down and look at their current loans and debt structure, personally and for their business. The beginning of 2020 is a good time to do this. “They should make sure their maturity dates, interest rates, and repayment structures are all properly set up right now.”

Why is this so important? Here’s a good example of how a loan that is extended too far puts the business owner in a tenuous situation. “You might have a loan for a piece of equipment. The equipment is only going to last another year, but you still have a 3-year term loan on that. You don’t want to be in that position because now you have to buy a new piece of equipment, and you’re still paying on the old equipment. We want to make sure everything is in place properly, and we help our clients do that.”

4. Do a tech check. “Look at your technology, and stay innovative,” Kevin said. “If you’re not innovative, you’re kind of left behind in the business world. Make sure your processes are smooth, and quick. Today’s consumers want a fast turnaround, and they pull a lot of information from websites and social media. Maintaining a good website and having a presence on social media is important for a lot of small business owners depending on their industry.” Automation is also key. “Try to automate as many internal systems as you can. Instead of cash, a lot of companies are opting for credit cards or ACH (Automated Clearing House) transactions. That’s a way to secure payments quickly. I think it’s important to automate the ability to send and receive payments quickly.” Many banks, including Fidelity, offer these services and free consultations to business owners with questions.

 

Learn More

Fidelity Bank has built a strong history as trusted advisors to the customers served and is proud to be an active member of the community of Northeastern Pennsylvania. With branches located throughout Northeastern Pennsylvania and the Lehigh Valley, Fidelity Bank offers full-service Trust & Investment Departments, a mortgage center, and an array of personal and business banking products and services. The Bank provides 24 hour, 7 day a week service to customers through a variety of digital banking tools, branch offices, online at www.bankatfidelity.com, and through the Customer Care Center at 1-800-388-4380.