By Teri Ferreira-Keyes
Owning one’s own business and being a successful entrepreneur is now more of an American Dream than owning one’s own home, according to letsmakeaplan.org, a financial planning web site. But business ownership is perilous, with only 50 percent of new businesses surviving the first five years. Not everyone can be Jeff Bezos of Amazon or Ben Cohen and Jerry Greenfield of Ben & Jerry’s.
The key to increasing the odds of success is financial planning, and not only in the realm of the business plan. A business owner must evaluate the multifaceted business risk in order to properly manage the associated personal financial risk. The business owner must be flexible and be able to adapt a personal financial plan as the business risk increases or decreases.
Whereas a business plan will incorporate budgeting, and marketing and selling a product, the personal financial plan includes tax planning, estate/gift planning, retirement planning, risk management, and investment management, according to letsmakeaplan.org.
Tax planning is inherently complicated, and ways should be explored to maximize the value of both the personal and business income. (Tax laws also change constantly, and this can be overwhelming.) Intertwined with this is risk management, which encompasses everything from early death to business interruption to natural disaster.
As one’s business grows, the estate planning needs will change as well. Simple wills no longer will suffice. Interestingly, investment management has a somewhat unique spin in entrepreneurship, as the business owner’s go-to investment is his or her own business. Diversification is important and needs to be taken into account. Related to the self investment strategy, business owners tend to think they may never retire – that their business will be their annuity and they are doing what they love anyway (in theory) so why not keep it going? Having a retirement plan is prudent for business owners to consider and should be part of the diversification and risk management plan.
It is sometimes a pitfall of the small business owner not to seek professional personal financial assistance, however it makes sense to outsource this help so the business owner can focus energies on the business with the comfort of knowing the personal finances are looked after.
Teri Ferreira-Keyes is the manager for the Falmouth and Woods Hole branches of Martha’s Vineyard Bank. She can be reached at 774-310- 2010.