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:
- 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.
- 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.
- 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.