As a small or family business owner, your business acumen and tenacity are what got you where you are today. You don’t need anyone to teach you how to run your business. You’re already doing an incredible job, so that’s not the purpose of this blog.
But there are areas in a business owner’s financial plan that are often overlooked. Critical aspects like building a solid asset protection plan and exit strategies often take a backseat between managing cash flow, providing service, and planning for growth.
In this article, we will highlight five common financial missteps business owners make and how a CPA investment advisory firm (Mention GDE here?) can help you address them before they become expensive mistakes.
1.Neglecting Asset Protection
Running a small business comes with its share of risks, and without an asset protection plan, you might find yourself vulnerable to lawsuits, debt claims, or other unexpected liabilities. Failing to safeguard your personal and business assets could lead to financial ruin, risking everything you’ve worked so hard to build. (mention cyberattacks?)
Consequences of Lack of Asset Protection
- Creditors or legal claims can target your personal assets, including your home, savings, or retirement funds, if your business is not properly structured. A single lawsuit or creditor claim can cripple your business operations if you fail to implement a risk management strategy.
- Avoidable financial losses occur when you neglect to protect assets through legal structures or carry inadequate insurance.
Some of the asset protection strategies that your CPA investment advisor might recommend may include forming an LLC or S-Corporation to separate personal and business liabilities. They may suggest umbrella insurance for added protection or setting up trusts to shield personal wealth.
CPAs also optimize asset structures, such as retirement accounts or real estate, to maximize protection under state laws. With their expertise, you can reduce risk and secure your financial future.
2.Failing to Plan for Business Exit or Succession
Every business owner will eventually leave their business, whether by choice or circumstance. But according to a report, 83% of business owners don’t have an exit plan. Without a well-thought-out exit or succession plan, this transition can lead to financial losses, operational chaos, and even the collapse of the business you’ve worked so hard to build.
Additionally, statistics reveal that nearly 75% of businesses don’t make it beyond the first generation of ownership. By the third generation, over 85% have ceased to operate, and only 95% survive beyond that point.
So, it’s never too early to start planning succession. Handing over leadership, financial management, and client relationships takes careful preparation. Starting early gives you time to choose the right successor, plan for operations when you’re no longer in the picture, and ensure a smooth transition to protect your business’s future. (Did you know GDE has a team of CPA Investment Advisors who are Certified Business Valuation Analysts with the combined knowledge in tax expertise, investment management and business sales to get you started on the right track to succession planning. ?)
3.Poor Cash Flow Management
Business is tough, and keeping people on your payroll when your business is losing money makes it even harder. Even profitable businesses can face financial trouble if they lack the liquidity to cover daily expenses, unexpected costs, or slow periods. Common mistakes that contribute to poor cash flow include:
- Inconsistent invoicing
- Accepting long payment terms from customers while adhering to short terms with vendors
- Overstocking inventory
- Mixing personal and business finances
Many business owners also neglect to build a cash reserve, leaving them unprepared for slow periods or emergencies. In fact, according to a PYMNTS report, 70% of small businesses have less than four months of cash reserves. Nearly half of U.S. small business owners skip their own paychecks due to cash flow problems, and 22% struggle to pay basic bills.
4.Overlooking Tax Obligations
Tax rates vary by state, and rules depend on your business structure, whether you’re a sole proprietorship, LLC, S-Corporation, or Partnership. On top of that, small business owners must juggle multiple types of taxes, each with its own deadlines and requirements. The most common types of taxes small business owners pay include:
- income tax
- self-employment tax
- payroll taxes
- sales tax
- property tax
- excise tax
Failing to manage tax obligations can have serious consequences for your business. Unpaid taxes or late filings can lead to hefty penalties, interest charges, and even legal action. Beyond the financial burden, unresolved tax issues can tarnish your reputation, disrupt operations, and strain relationships with employees or investors.
Another mistake that small businesses make is not taking advantage of tax strategies to minimize their tax liability. Small-business owners have access to tax deductions not available to individual taxpayers. A CPA investment services firm can help you identify which taxes apply to your business, ensure accurate filings, and develop a tax strategy to minimize liabilities.
5.Lack of Diversification
“Don’t put all your eggs in one basket.” This classic advice applies to small business owners when it comes to personal investments. Many entrepreneurs pour everything back into their businesses, overlooking the need to build a diversified financial portfolio.
While reinvesting in your business is important, relying on it as your sole source of wealth is risky. Economic downturns, industry changes, or unforeseen challenges can put your financial future in jeopardy if you don’t have other investments to fall back on.
A strategy and investment advisory services firm can help you balance business growth with personal financial security through smart investment portfolio management. This might mean diversifying into stocks, bonds, real estate, or other assets to create a stable financial foundation.
Check out our Three Pillars Investment Management Program to learn more about our investing philosophy.
How to Find an Investment Advisor for Small Business Owners
Finding the right investment consultant starts with looking for someone who understands the unique challenges of small business ownership. Here’s what to prioritize:
- Look for advisors with CPA, CFP, or CFA certifications.
- Choose a firm with a proven track record of working with businesses.
- Find an advisor experienced in areas like tax planning, asset protection, and investment portfolio management.
- Consider other areas of expertise including business valuation and business sales services.
- Make sure they offer clear fee structures and prioritize your best interests.
Ask for referrals, check reviews, and schedule a consultation to confirm their approach aligns with your goals. The right investment advisor will make you confident in every step you take for your business.
Get in Touch With Griffiths, Dreher & Evans, PS, CPAs.
For 20+ years, Griffiths, Dreher & Evans, PS, CPAs have been helping business owners with a combination of CPA tax expertise and proven investment strategies. We’ve been named one of the Top 150 CPA firms providing investment advisory services in the U.S. by Accounting Today for the past five years. With us, you get expert guidance and personalized service you won’t find in many investment management firms in Washington (throughout the Pacific Northwest). Schedule a no-cost, no-obligation Discovery Meeting here.