3 Mistakes Small Business Owners Should Avoid

Small business owners are in a different situation when it comes to money. They have to be more careful with their finances because income can be unpredictable to say the least. A client of mine that owns a business decided to cut back on his own hours instead of laying off some of his very qualified staff. That’s the mentality of a smart business owner in tough times.

Another client of mine, who started a business spends his spare time running the business to keeping his overhead low and make ends meet.

Regardless of how you are maintaining your small business, you don’t need your personal finances working against you. It is important to avoid making bad decisions with your money. Three investing mistakes many small business owners would be better of avoiding are:

  1. No Cash Cushion – Small business owners need to build a cash reserve also known as an Emergency Fund. Typically three to six months worth of expenses is enough. If your income is less consistent, you might save up to a year depending on your comfort level. The best way to create a cash cushion is to set up an automatic deposit into your bank or money market fund. If you income is too sporadic to give you a monthly income, take a percentage of each receipt or deposit and put it in a separate account meant for saving.
  2. Ignoring Taxes – Many small business owners are so focussed on their business that sometimes they forget about taxes until April 15th. Then they scramble to find ways with their accountant to lower their tax bill  and/or talk to their financial advisor about taking money out of their investments to pay the tax. Tax planning with your investment advisor to create a well crafted tax efficient portfolio can reduce the tax drag on their return, and lower your bill come April. Working with your accountant can prevent surprises in April. Your financial advisor and accountant working together can try to lower your taxes in other creative ways as well. See my article on Using Stock Market Losses To Lower Taxes as one example.
  3. Poor Diversification – One of the worst things a small business owner can do is invest too much of their portfolio in the same industry that they work. For example, if you own a jewelry store, you might not want to buy a lot of precious metal funds in your portfolio. If gold goes down, your inventories AND portfolios suffer at the same time.
As business owners we understand the value of a dollar. How we choose to manage our investments must be sensitive to our situation as a small business owner.

About the author

Richard T. Feight, CFP®

Among independent financial advisors, Mr. Feight is one of the most well known and highly respected “Fee-Only” financial planners. Since 1997, Rich has dedicated his career to offering low cost “Fee-Only” comprehensive financial planning and investment advice. Rich assists his clients in organizing their finances so that they can retire on time.Rich is a graduate of Michigan State University where he received his degree in Finance. Rich has earned the Certificate of Financial Planning from The College for Financial Planning in Denver , Colorado that was comprised of intense graduate level classes grounding him in the various foundations of financial planning. He is a CFP® (Certified Financial Planner®) since 2001, meeting the experience, education requirements and passing the two-day, 10 hour exam, making him one of the few in the country who hold the designation. Since 2003, Rich has subscribed to the stringent and mandatory annual educational hours, experience, and code of ethics to meet the requirements to be a NAPFA Registered Financial Advisor. Out of the 800,000 individuals in the country who claim they are financial advisors/planners, fewer than 1,300 in the country qualify for the membership; Rich is one of them.

Rich is the President of the Financial Planning Association (FPA) of Michigan . The FPA of Michigan is one of largest and influential chapter in the country. Rich was recently named President for Transportation Toastmasters Club 4776 downtown Lansing . He has been quoted in both local and national media from Noise Magazine to CNBC, and Bloomberg, and industry news publications such as Investment News and Financial Advisor Magazine. Rich enjoys public speaking and has spoke at industry educational meeting, high schools, and executive investment clubs, AARP conferences, and business educational seminars for companies looking to educate their employees. Rich views his role as a Fiduciary for his clients as the single biggest key to any planning relationship and strives to provide the most competent, unbiased and objective advice in the financial planning profession today.

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