It’s a scenario that rings true for many business owners: they spend so much of their time hyper-focused on building their company that they neglect their own personal financial health. But business and personal financial goals can be reached concurrently and do not need to be mutually exclusive.
Two areas where business owners should be keenly focused are developing a strong overall financial plan and anticipating regulatory developments that might impact a company and personal wealth-building. Four tips, in particular, can help guide wiser financial decisions and protect both business and personal goals.
Diversify away from the business
Probably the most important, over-arching way a business owner can ensure their future personal financial well-being is to avoid having all of their financial eggs in one basket, diversifying their investments beyond the enterprise they own. While their investment in the company may well be the one investment that generates the highest return over their lifetime, the company will have greater inherent risk, particularly “single enterprise” risk. To protect against having one’s entire financial future riding on their company, a business owner would be well advised to develop a diversified investment portfolio.
Protect the Bottom Line
Another way to ensure a business’s financial well-being (and, therefore, that of the business owner personally) is to guard against potential damage to the company by having adequate business insurance coverage. No one wants to see their hard-earned success threatened by a natural disaster or lawsuit. Three types of business insurance to consider are general liability insurance, business income insurance and commercial property insurance. In addition, key person insurance is recommended if the death of a key employee would threaten the company’s financial viability.
Offer a qualified retirement savings plan
An effective way for business owners to ensure their own financial well-being is to offer a qualified retirement savings plan to employees and to fully fund the plan on an annual basis, whether it is a 401(k) Profit Sharing Plan, SEP or SIMPLE. For newly established or cyclical companies, SEPs (Simplified Employee Pension Plans) are an attractive option since employer contributions can vary from year to year, as long as each employee receives the same amount. Offering a SIMPLE IRA gives the employer contribution options – they can either match employee contributions or contribute a fixed percentage of salary each year. Also, from an administrative standpoint, the SIMPLE IRA is indeed simple since there are no filing requirements for the employer with the IRS; rather, the investment firm handles the filing.
Understand public policy
For the future financial security of a company and its owner, it is critical to keep an eye on public policies that impact small businesses. Currently, with a new administration at the helm, there are many regulatory and tax-related developments that will affect businesses both positively and negatively.
Small businesses with government contracts will benefit from President Biden’s recent signing of an executive order closing the loopholes in The Buy American Act — requiring that companies accepting federal contracts must be based fully in the U.S., and prohibiting them from sourcing materials internationally. Since the Federal government purchases close to $600 billion in goods and services annually, this is good for American businesses.
In another executive order, Biden highlighted a commitment to build a “modern and sustainable infrastructure” and to deliver an “equitable clean energy future,” so businesses in the clean energy, sustainability and transportation sectors will see growth opportunities. A new infrastructure bill will be introduced in the near future, and while the terms are still to be negotiated, transportation and large construction firms can expect to profit.
An executive order that will negatively impact certain energy and construction businesses is the revocation of the permit to construct the Keystone XL oil pipeline. Without the pipeline, it is likely that businesses’ energy costs will be higher. And estimates as to the number of jobs that will be lost as a result of the cancellation of the pipeline construction range from 4,000 to 11,000 two-year positions.
At this time, tax policy as it relates to small business is more of an unknown. While the Biden administration is unlikely to crater the recovering economy with higher taxes in 2021, it all may come down to the mid-term elections in 2022. Some of the new infrastructure plans will require more Federal dollars — so future tax hikes are likely.
Of course, it is understandable that business owners focus predominantly on growing their companies — but to guard against neglecting the bigger financial picture, working with a trusted financial adviser can help. Responsible planning, diversification, and knowledge of future policy and regulatory developments can contribute to the financial success of a business and its owner over time.
Michael Joyce, founder and president of Agili in Bethlehem, and Richmond, Virginia, is responsible for overall investment strategy, management of investment portfolios and financial planning services. He can be reached at MJoyce@AgiliPersonalCFO.com.