Small business owners often pour everything they have into their ventures — can you relate? From sweat on your brow to dipping into your bank account, you’re willing to do almost anything to make your entrepreneur dreams come to life. But remember that this should also include building a strong foundation for your business with solid financial planning.
When it comes to finance for business owners, a thoughtful and intentional approach — including setting goals and priorities — and the tools to make business finance easier to manage will put you on the path to financial well-being.
TIP: If you have a financial planner, there’s a lot of value in coordinating a meeting with your CPA and planner.
Let’s explore some steps to give you greater control of your finances (personal and business) and much-needed peace of mind so you can focus on growing your business.
1. Set the vision for your life and business
Long-term snapshot
What’s your long-term vision for your life? This is a great place to start. Go full pie-in-the-sky on this one: what does a day in life look like for you ten years from now? How are you spending your time? Is this what financial freedom feels like?
Paint the whole picture with broad and fine brushstrokes to get an idea of what kind of life you’re building towards.
3-year snapshot
Next, describe what your life needs to look like in three years to be on track to achieving your 10-year dream life. How much is your business doing in revenue? What about profit?
Setting actual goals beyond one year isn’t always fruitful, as so much can change in a year these days — so keep it high-level.
1-year goals
Now, with the long-term vision for your life (and your business), it’s time to set some goals for the following year. What must you accomplish in the next year to move you one-third closer to your three-year snapshot?
2. Break it down into 90-day priorities
It’s proven that splitting big goals into quarterly priorities helps people focus and improves their chances of achieving the longer-term vision. If you were only going to accomplish a few things in the next three months to move you closer to your dream life, what would they be? Pick a few to focus on.
These quarterly priorities are also known as SMART goals, OKRs (Objectives and Key Results), or 90-day rocks.
At True North, we want you to reach your financial goals and realize that dream life. A good starting point is to have a realistic picture of your current financial situation.
3. Build your budgets
It’s often difficult to separate business goals from personal financial goals. When it comes to compensation and earnings from your business, it makes sense to figure out your personal and family financial requirements first.
Step 1: Start with determining the monthly burn rate of your household
Start by building a household budget by exporting the last six months of your personal banking and credit card statements into an Excel (.csv) sheet. Then, calculate your fixed costs and discretionary costs to determine how much you need each month to live.
Step 2: Add in additional costs that aren’t necessarily monthly:
- House downpayment
- New car fund
- Kitchen renovation
- Post-COVID vacation
- Kids college fund or RESP
- And how much you need to be investing for your retirement
You’ve now built your household budget, which will help you on your road to financial stability.
Step 3: Pay yourself from your business
Using this household budget number (an after-tax amount), you need to determine if this will be a dividend or a salary. This will help you calculate the gross amount to pay yourself from the business. Don’t forget to add your savings and investing amount to your household budget to determine your pre-tax target compensation.
Example:
To see this in practice, let’s say your household budget is $7,500.
As a salary, this would be about $10,000 gross salary or $120,000 a year.
If you paid yourself in dividends, this would be about $100,000. Keep in mind that the corporation would also pay about $11,000 in corporate taxes on the dividend.
Step 4: Can your business afford to pay you that amount?
Next, calculate a budget for your business by taking your monthly financials from last year and using them as a starting point for the upcoming year’s budget. Apply the appropriate growth rates to revenue and any variable costs associated with earning that revenue. Don’t forget to consider the fixed costs you will incur over the next year, including your compensation, as calculated in step three. Will you have a positive net income, or are you forecasted to have a negative one?
You may need to adjust some things to make your plan work:
- Revisit your household budget
- Reevaluate your business profitability projections
- Review your future savings and retirement goals
You will likely need to explore a combination of all three. If you’re just starting out, you may need to extend your business budget (target forecast) by two or three years to build the business.
Step 5: Finalize your business budget
Now, you’re ready to copy your business budget into a new sheet called “Target Forecast.” You can play with the revenue and costs to figure out how much your business needs to make to hit your target compensation level while still hitting your target profit margin.
If you’re using Xero, you can add your budget to your account so you can track Budget vs Actual each month and know whether you’re trending in the right direction.
4. Find your focus
Congratulations! You’ve just created a realistic plan to help you achieve your financial goals. Now that you know what needs to be done, you can start living and running your business more intentionally.
This is when we’d recommend finalizing your one-year goals and the 90-day priorities mentioned earlier.
5. Make a detailed plan
Now that you’ve established goals and know where to focus your energy, it’s time to get granular. Break down your goals into small, achievable steps. When executed, this action plan will move you closer to your goals. Be intentional by dedicating time each day or week to work on your focus items. Every little step will help you accomplish those priorities and add up to reaching the one- and three-year goals you set.
6. Choose a tool to make things easier
As you know, there’s a lot to manage as a small business owner. Entrepreneurs can leverage smart tools that streamline day-to-day tasks and take the stress out of financial security. Tools like Wealthsimple can help you create an investor profile and recommend investments to match your risk profile and retirement goals, even if you don’t have a deep understanding of investing. Here are some other useful tools:
- Helm connects with Xero and helps forecast your future cash balance.
- Xero offers accounting software that simplifies everyday business tasks like invoicing, collections and bookkeeping.
- Youneedabudget (YNAB) enables you to gain control of your budget and teaches you how to manage your money to get ahead.
7. Do the work
This one should be easy since you’re your boss (which means you probably enjoy your job much more than the average person). Wake up and design each day with a relentless commitment to accomplishing your priorities.
And get help if you need it. If you need financial support to get through a tough period (say, a pandemic), consider loans and relief programs.
Learn more about Alberta and Canada’s small business loans and grants.
8. Reflect, revamp, repeat
Review your past quarter and assess your priorities. And don’t forget to celebrate the wins and consider the losses. How can you apply what you learned to the next quarter with a focus on those one-year goals?
Recreate your 90-day priorities each quarter with a focus on those one-year goals. Spend time each year revisiting your three- and 10-year snapshots and setting your one-year goals. Before you know it, you’ll be sailing into your 10-year dream goals.
At True North Accounting, we help small business owners establish a foundation for success and thrive. Book a meeting with one of our knowledgeable CPAs so we can examine your business’s numbers, give you the low-down on its performance, and create a growth plan.
Find more Strategic Advisory topics relevant to you and your small business.
