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A Guide to Financial Planning for Small Business Owners

Financial planning for small business owners

Managing a small business involves wearing many hats. In his book The E-Myth, Michael Gerber labels these hats: "technician, manager and entrepreneur." That is, one to carry out the work, one to manage the business and the other to strategize about what comes next.

A fourth hat business owners must wear is that of a financial planner.

A well-structured financial plan is the backbone of your business's success, allowing you to navigate the complex financial landscape, set goals, and make informed decisions.

Yet given the 7-day work weeks managing all aspects of your business, the financial planner hat likely isn't worn as often as it should.

If you don't have a financial plan or have one that hasn't been updated in a while...

Here is the essential guide for creating a comprehensive financial plan for small business owners.

Step 1: Define Your Business Goals

Start by simply clarifying your business objectives. Where do you see your business three years from now? Are you focused on rapid growth or maintaining market share? Do you plan to sell your business and if so, when and to whom?

Don't worry too much about getting specific with numbers and financial data here. We'll save that for later.

The goal is to get clear on what you want to achieve with your business. This will help guide the financial planning process and set the stage for important decisions you'll have to make down the line.

Take as much time as you need with this step as it's probably the most important one on this list.

Step 2: Align Business Objectives with Personal Goals

Concurrent with the first step, it's a good idea to identify your personal financial goals and align them with your business goals.

Too often I've seen business owners place too much emphasis on their business objectives and not enough time and attention towards their personal finances and retirement.

For example, you may want to aggressively grow your business for the foreseeable future, yet also want to retire early and spend more time traveling with your family. As such, your business goals may need to be shifted towards enhancing operational efficiencies and succession planning rather than making capital investments to fuel top-line growth.

Step 3: Analyze Your Financial Statements and Run Projections

For most small business owners, their most valuable financial asset is their business. Accordingly, it's important that you understand your numbers inside and out.

At a minimum, you'll want to review your current balance sheet, income statement, statement of cash flows and owner capital. These reports will assist you in assessing the overall financial health of your business.

In addition to obtaining current financial statements, you'll also want to pull historical financials in order to identify unique trends, growth rates, margin expansion, etc., within your business over time.

Lastly, you'll want to take this data and use it to run a financial projection so you can identify potential risks and opportunities that may arise should business continue as planned.

Step 4: Identify Key Performance Indicators

In addition to analyzing your financial statements and running projections, you'll also want to pay close attention to your key performance indicators, or KPIs.

KPIs are financial metrics that business owners use to evaluate performance in various aspects specific to their company and industry.

For example, if you're considering reinvesting excess cash flow into marketing and advertising to attract more commercial customers and increase revenue, you'll likely want to track your customer acquisition cost (CAC) and customer lifetime value (CLV). Monitoring these metrics will make it easier for you to calculate the potential return on those marketing and ad dollars over time, allowing you to determine the optimal amount of cash flow to reinvest.

Step 5: Assess Liquidity and Access to Capital

Cash has often been described as the lifeblood of a business.

Whether you're looking to sell your business or expand through acquisition, you'll want to have a firm grasp on your company's current cash position, outstanding debt and access to capital as each are critical in supporting any future business endeavor.

The amount of cash on hand and debt outstanding can also have a profound impact on your company's valuation depending on the industry you're in.

Your balance sheet and statement of cash flows will be good resources to help you closely monitor these figures and ensure they're reflective of your overall business goals, especially if those goals involve the sale of your business.

Step 6: Risk Management

Risk is an inherent part of any business that can't be avoided. That goes for more generalized risks such as economic recessions and inflation to those specific to your industry.

Implementing effective risk management strategies within your small business is crucial and should be carefully thought out.

It helps to first identify the primary risks that could have the most severe impact to your business. These may include the risk of a cyberattack, loss of a major customer, regulatory or environmental issues; really anything that could significantly disrupt business operations.

Once the risks are identified, you can then begin to implement plans for if/when these risks become a reality. That may include reviewing and/or updating your business liability insurance policy, installing a new back-up system or hiring an IT firm to enhance cybersecurity.

Developing contingency plans to mitigate risk will aid in protecting your financial stability and help you sleep better at night.

Step 7: Review the Corporate Structure

The only constant in life, and in business is change.

As such, it's good to review the current corporate structure of your business and determine if it's still appropriate and adaptive to the current regulatory environment.

For example, if your business was setup as an S. Corporation ten years ago and you're looking to raise capital from a limited partnership like a venture capital firm, you may need to consult with your attorney or CPA to reassess your corporate structure and transition to a C. Corporation.

Corporate structure will also have an impact your taxes, which we'll discuss next in further detail.

Step 8: Tax Planning

Small business owners face a more complex tax system than the typical W-2 employee.

Sole-proprietor LLCs are taxed differently than S. Corporation owners who have different tax basis rules than partners in a partnership.

Work closely with a tax professional to help you understand your current tax situation and implement a plan that optimizes your after-tax dollars.

This may include, for example, maximizing deductions such as the Qualified Business Income Deduction (QBI), using accelerated depreciation on a new asset purchase, or getting a dollar-for-dollar return on your research and development costs through the R&D tax credit.

Step 9: Integration

A tax plan solely for your business is incomplete without integrating it with the personal side.

Any change in business income, expenses, deductions or credits as a result of implementing a corporate tax planning strategy will have a direct impact on your personal taxes. Be certain your business and personal tax plans are executed in tangent with one another.

For example, if your business tax strategy involves taking accelerated depreciation on a large fixed asset purchase, your business may show little to no income, maybe even a loss. This may present an opportunity for you to make a sizable, tax-free Roth conversion.

Step 10: Retirement Planning

Another way to save money on taxes and boost your next egg is with a small business retirement plan.

Contributing to retirement plans such as a 401(k), Simplified Employee Pension (SEP) IRA or Simple IRA provides an added benefit to your employees on top of their salary while also serving as a tool for reducing your tax bill and saving for retirement.

If you don't have a small business retirement plan in place, or have one that hasn't been reviewed in a while, consider engaging a financial professional to help you determine what type of plan is best suited for your business.

Aside from your company retirement plan, you'll also want to consider the value of your business and how an exit would impact your own retirement.

Step 11: Business Valuation

Privately held businesses are highly illiquid and generally require some form of valuation in order to determine what they're worth.

Since most business owners rely on a full or partial sale of their business to fund their retirement, it's important you understand the value of your business and how that value is derived.

Valuations can vary widely depending on the industry you're in. A professional services firm focused on tax preparation might be valued at 1x gross revenue while a similar firm with more service offerings may fetch 2x sales.

Financial metrics also play a key role in valuation. For example, EBITDA may be a more appropriate metric for calculating a manufacturing company's value whereas gross revenue or owner's compensation might fit better for a service-based business.

Consider the use of a Certified Valuation Analyst, or CVA to help you in determining the value of your business.

Step 12: Engage Professionals

As a successful business owner, you understand the value of outsourcing specialized tasks to professionals so you can focus on what you do best.

Just as you have internal accountants to manage your books and a sales team to drive in new business, you'll want to consider hiring external professionals such as Certified Financial Planners, CPAs, attorneys and business consultants to assist you in crafting a comprehensive small business financial plan.

Their expertise can provide valuable insights and ensure your financial plan is well-informed and efficiently executed.


Creating a financial plan for small business owners is an ongoing process that requires dedication, research, and careful analysis.

By following these steps, you'll establish a solid foundation for financial success, enabling you to navigate the complexities of business ownership and financial independence with confidence and informed decision-making.

Remember, a well-crafted financial plan isn't just a roadmap—it's a crucial tool for steering you and your small business towards financial independence.

Image by Aaron Burden


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