In the past few years, I've worked with close to 100 business owner households.
I've watched both the good & the bad and found many are making the same mistakes.
Ones you can easily avoid in your own life.
Let me walk you through 9 of the biggest mistakes you need to avoid:
38% of businesses fail due to a lack of cash reserves.
Having a cash reserve in your business is not an option, it’s a necessity. It’s that simple.
How much do you need? Well that depends on your business.
Businesses with a lot of clients, recurring revenue, high profits, etc need less cash.
Business a few clients, shorter contracts, less profits, etc. need more cash.
Businesses that are very cyclical need more cash.
I typically advise to start with 1 extra month of operating expenses in checking and 2 months of operating expenses in savings and then move from there. Some need way and some need a little less.
On the flip side, holding too much cash in your business is also not a great move. Give every dollar a purpose:
Then with extra dollars, reallocate and use them to grow.
This is a big one. A lot of business owners get started and they don’t think about taxes, but you have to.
Most businesses are pass through entities, this means the profit all flows through to you and your tax return regardless of whether you leave the money in the business or take it out.
Make sure you hold enough cash for your quarterly estimates and for what you will owe in April above safe harbor.
It is so easy to get caught up in the idea of building your business for 10-30 years and then selling it and sailing off into the sunset. But the reality is that that might not happen. Especially in today's world with AI, we have no idea what your business will be like decades down the line.
You need to be using profit and your income to improve your financial life. This could mean:
Do not ignore your personal financial life for too long.
I don’t think this one gets talked about enough. Working with a lot of business owners allows me to see it all.
We have some clients (like me), who own a business and all the rest of their investments are liquid.
Then we have some clients who have their business, real estate, and private investments.
I can tell you the people in group 1 have a way better financial life. You do not want to be too illiquid. One thing going wrong can destroy your financial life.
Your business is your place to be illiquid, to be concentrated, etc. This does not mean you can’t own private investments or real estate. You just want them to only be a part of your investments. Build liquidity through cash, a taxable account, Roth accounts, etc.
There’s 2 mistakes inside of this one:
1) Getting too comfortable/cocky
Oftentimes, you will see business owners have 1 great year and assume that will continue forever. They lose focus. They take their foot off the gas. And then all the sudden they look and see they are having an extremely down year.
You have to stay focused and constantly improve or your competitors will take you out.
2) Increasing lifestyle too much
One good year does not mean this is the new norm. Business owners see this and change their lifestyle quick. They move houses, get a new car, start private school, etc. and then the business declines. It is incredibly hard to back out of lifestyle. My rule of thumb for business owners is to base their spending off of their income 2 years prior. This helps you not make rash changes that do not fit you moving forward.
Managing a business is complex, I won’t sugarcoat it for you. You need the right team around you to help ensure everything is going well. This is not an area you want to cheap out on. You need:
And you need them to all be working together. Most of the clients that start working with us have poor teams around them that they have outgrown. We always start by vetting and bringing in new experts they need. This is a great way to avoid the big mistakes you would not have known about.
You wouldn’t drive without car insurance, so why run a business without proper coverage? No disability insurance, no umbrella policy, no business liability—huge mistake. One lawsuit, one health scare, one slip and fall and you’re toast.
I help every client get the right coverages in place. The goal is to insure what you need but not anything more.
People say the tax code is made for business owners and they are right. But what is also true, is that you will pay a crazy amount of tax if you:
99% of the business owners I talk to are doing 0 real tax planning. You need more than just someone filing your taxes when you run a business. It pays to be proactive.
For most people, selling their business is the goal. But how you sell your business, when, to who, for how much, etc. is really important. You do not want to start thinking about it as you are selling the business. You want to be planning 5 or so years out so you can get the most value and also pay the least in taxes.
Plan ahead!
These are 9 of the biggest mistakes I see business owners make.
Learn from these and avoid them in your own life.
Financial Advisor