How would you rate your business’s financial health at this exact moment in time? You may think, well, business is booming; sales are up, I have great cash flow, and my profit margins are excellent. If that’s you, great! But there’s a lot more to your business’s financial health than cash flow and profit margins. So, let’s take a step back and look at your business from a birds-eye view.
In this article, I’ll walk you through the key steps of performing a general financial checkup for your business. We’ll cover reviewing your financial goals, integrating personal and business financial plans, assessing your business structure, and reviewing your tax strategy. By the end, you’ll have a clear roadmap to evaluate your company’s financial health, and with regular checkups alongside a financial professional, you’ll be better equipped to make informed decisions and drive success in the coming years – and well into the future.
Review Your Financial Goals
Business changes fast, especially in these times of accelerated technological growth, and perhaps your financial goals may need to be adjusted to align with new opportunities and industry trends; alternatively, your customer preferences may have shifted, requiring you to adapt your own product line or marketing strategies to keep up and expand. One hot topic right now is automation via artificial intelligence. While the industry is still in its infancy, it is worthwhile to look into existing tools that can automate or drastically simplify tasks, freeing up valuable time and reducing overall costs.
Next, look at your cash flow statements from the past year or two. Are there consistent periods of high and low cash flow? Many businesses experience seasonal fluctuations, and if you identify these patterns, you can plan ahead – perhaps by cutting costs during slow periods or setting aside extra funds during peak times to cover leaner months.
Do you have a plan for managing your company’s excess cash flow beyond what is used to cover leaner months? Instead of taking it as income or keeping it in a company bank account where it may lose value due to inflation, evaluate investing the excess capital. This strategy is particularly beneficial if you plan to aggressively expand your business and acquire tangible assets that support growth. Additionally, if your company falls within a lower tax bracket than your personal tax bracket, investing the company’s money could be more tax-efficient than receiving a higher income and investing it personally.
Objectivity is key to business success, and we may look at our own successes with rose-tinted lenses. Comparing your business to industry standards, however, can help you objectively identify areas where you are overperforming and underperforming and fine-tune your strategies as necessary. Take a close look at your P&L Statement and Balance Sheet. How do your revenue growth, gross margin, and net profit margin compare to similar companies? Are you taking on higher-than-average levels of debt alongside low levels of liquidity? If so, how are other companies achieving their goals without risking their financial health?
Finally, are your financial objectives still relevant, achievable, and aligned with both market realities and your long-term business vision? If not, you may want to consider either adjusting your existing goals or creating new ones, and there’s nothing wrong with that. Remember, many companies failed because they couldn’t, wouldn’t, or didn’t adapt their goals to evolving realities. This is your chance to stay ahead of the curve and ensure your business’s financial health is robust and future-proof.
Integrate Your Personal & Business Plans
Your business is essentially an extension of your broader ambitions in life, and the line between your personal and company finances can get blurry. For instance, if you’re aiming to completely exit from your business in 15 years, your business strategy should support this goal. Alternatively, if you plan to simply take a step back and allow a family member to take the reigns with your supervision, specific strategies can be implemented now to achieve those aims later on.
Most of us establish our own businesses with the core objective of building personal wealth, but often, just a few technical tweaks can enhance a business’s ability to enrich its owner without significant changes in profit. For example, does your business plan factor in your own retirement savings targets or health expenses with tax efficiency in mind?
Business Retirement Plans
| Retirement Plan | Contributions | Tax Advantages |
|---|---|---|
| SEP-IRA | Employer contributions up to 25% of compensation, or $69,000 (2024 limit), whichever is less | Contributions are tax-deductible for the employer and grow tax-deferred until withdrawal |
| SIMPLE IRA | Employee contributions up to $16,000 (2024 limit); Employer match up to 3% of compensation or 2% non-elective contribution | Contributions are tax-deductible and grow tax-deferred until withdrawal |
| Individual 401(k) | Employee contributions up to $23,000 (2024 limit); Employer contributions up to 25% of compensation; total contributions not to exceed $69,000 | Contributions are tax-deductible and grow tax-deferred until withdrawal |
| Defined Benefit Plan | Contributions based on the benefit amount and employee’s age; limits vary based on actuarial calculations | Contributions are tax-deductible for the employer and grow tax-deferred until withdrawal |
If you don’t already have one, you may want to implement a retirement plan for your business, such as a SEP-IRA or SIMPLE IRA. Not only can these plans save money on taxes and improve your retirement readiness, but they also improve employee satisfaction and improve recruitment efforts. If you already have a retirement plan in place, perhaps it can be improved. At WealthGen Advisors, we’re experts in fine-tuning retirement plans, so if you have any questions regarding your company retirement plan, don’t hesitate to reach out.
Exactly when you take your income and claim expenses can also drastically impact your personal finances. Strategically timing them can help manage your tax brackets. It’s also important to analyze how business risks might affect your finances. Ensure you have adequate insurance coverage, including liability, property, and potentially key person insurance, and strive to keep your personal liability to a minimum. Insurance policies can be complex, so it’s important to speak with a fiduciary advisor to review your coverage needs before talking with an insurance agent.
Assess Your Business Structure
Your business structure affects everything from day-to-day operations to taxes and how much of your personal assets are at risk. As your business evolves, the structure you chose when you started might not be the best fit anymore. For example, if you started as a sole proprietorship but have since taken on employees, you might want to examine forming an LLC or corporation. Naturally, changing structures isn’t an easy task and not something you’d do every year. However, it’s safe to say that you should keep an eye on your situation and determine when is the right time to make the switch.
Business Structure Taxation
| Business Structure | Income Tax | Self-Employment Tax |
|---|---|---|
| Sole Proprietorship | Profits taxed as personal income | Subject to self-employment tax |
| Partnership | Profits passed through to partners and taxed as personal income | Partners subject to self-employment tax on their share of income |
| Corporation (C-Corp) | Profits taxed at corporate tax rate | Dividends taxed again at personal income tax rate when distributed to shareholders |
| S Corporation (S-Corp) | Profits passed through to shareholders and taxed as personal income | Shareholders not subject to self-employment tax, but must pay themselves a reasonable salary |
| Limited Liability Company (LLC) | Can choose to be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp | Members may be subject to self-employment tax depending on tax classification |
Different structures have varying tax treatments that can significantly impact your bottom line. For instance, an S-corporation might allow you to reduce your self-employment taxes compared to a sole proprietorship or partnership. You should also consider how each structure aligns with your long-term personal ambitions, such as plans for passing down your business to your family members or the utilization of trusts to reduce your taxable estate – especially relevant, considering lifetime exemption limits will be reduced at the end of 2025 with TCJA’s sunset. In this case, a Family LLC or Family Limited Partnership may be highly relevant to your situation.
In Conclusion
Each business is its own unique reflection of its owner, in many ways an extension of their personality, drive, and inspiration. Like its owner needs an annual health checkup, a business often needs a checkup of the financial variety to make sure it’s healthy and sound. Not doing so can lead to a variety of issues, such as missed opportunities and failure to catch issues before they become problematic.
This article won’t help you evaluate your financial readiness on its own. Instead, it aims to help you raise the right questions for further investigation and seek advice if you’re not equipped to answer those questions on your own. And while this article doesn’t raise every issue possible – that would require an entire book – we believe it’s enough to at least get you started and motivate you to frequently evaluate your company’s financial health beyond your monthly profit/loss statement.
If you need assistance, we’re here to help. We have assisted numerous Sarasota and Florida-based organizations in reducing retirement plan costs, creating tax-efficient estate plans, and leveraging advanced financial analysis software to enhance their bottom line and boost retirement readiness. Click the button below to get started!
