The difficult economic times we’re in have small business owners scouring their companies’ books, looking for ways to improve cash flow and preserve their profits. They should also be taking that kind of care with their personal finances.
For some company owners, personal finances, especially saving for retirement, get short shrift as the business gets all their money and attention. Financial advisers say that’s a mistake.
“A small business owner’s personal finances and business finances are often intimately related. We want to review them both,” said Bob Doyle, president of Doyle Wealth Management Inc. in St. Petersburg, Fla.
The fact is, in the current weak economic environment, it may well be critical to first fund the company rather than a personal savings or retirement account.
“Figure out what your cash flow requirements are in the event that your business turns down,” said Gregg Wind, a certified public accountant with Wind Bremer Hockenberg LLP in Los Angeles. “Figure out what you need to have the doors open and meet payroll.”
He suggests companies have at least six months of operating capital on hand.
But, he said, business owners need to make sure that their salaries and savings are part of the budget.
“Pay yourselves first,” he said. “Take a salary. If you’re a sole proprietor, take a distribution and save. … Try to go on a steady savings plan.”
Owners can be tempted during tight times to skimp on their retirement accounts, or even bail out of their investments.
“I have had several people question, with everything going on now, should I be selling (stocks) and raising cash? Or should I cut back on contributions” to retirement accounts, Doyle said.
His answers: “No, and absolutely not.”
If you feel you have to raid your 401(k) account, and the plan allows for loans in addition to withdrawals, you’re likely better off borrowing, Wind said.
Withdrawals from 401(k)s and other tax-deferred retirement accounts are treated as taxable income by the government. Moreover, if the owner of a retirement account is younger than 59 1/2, the government levies a 10 percent penalty for early withdrawals.
Wind and Doyle suggest that this is a good time for small business owners to sit down with a financial professional such as an accountant or certified financial planner. A planning session will likely be more about the future rather than what’s going on right now.
“You have to keep in mind where you want to end up,” Wind said.
Perhaps the most important part of a review of personal finances is asset allocation — how your money is divided among stocks, bonds, cash and tangible investments such as real estate. But an owner also needs to consider his or her holdings within one of those categories of assets; with stocks, for example, how much is invested in small or large cap companies, or in specific industries such as high-tech or consumer cyclicals.
If one sector or even asset has been hit harder than others, or, conversely, if one is doing much better than others, it may be time to shift some money around to get a portfolio back to the owner’s preferred levels of risk and diversification. Or, in this badly performing stock market, to position a portfolio to benefit when the downturn is over and Wall Street heads higher again.
Some small business owners take the view that their companies are their retirement savings — they expect to sell the business when they’re ready to stop working and live off the proceeds. So they don’t feel a need to have separate retirement accounts.
Doyle said that can be a dangerous approach — especially if the business is one whose products or services could be rendered obsolete or that are extremely vulnerable to economic cycles.
Just as you wouldn’t put all our money into one stock, “don’t put all your money into the business,” Doyle said. “You need to have an alternative plan.”
Joyce Rosenberg writes about small business issues for the Associated Press.
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