Personal Financial Health Affects Your Business Financial Health
Make a business plan for the company and a personal financial plan for yourself.

By Cindy Richey, CFP

For most small business owners, there’s a fuzzy line between their personal financial goals and their business financial goals. In fact, the two often seem completely entwined.

“If my business is doing well,” you might think, “I’m doing well. Right?”

But while the two are closely related, both finances are best served by looking at them separately. Ideally, there should be a business plan for the company and a personal financial plan for the owner. And, both should be in writing and updated annually.

Following are some steps to help simplify the maze of business and personal finances.

Set Business and Personal Goals
For your business, the goal is usually to make more money in sales and profits than the year before. While this is a worthy goal, developing a written business plan can help you think beyond your current strategies and consider what’s possible long-term.
With personal financial goals, the No. 1 planning issue is retirement. Even if we love what we do, most of us would like for work to be optional at some point in our lives.

Consider when that time is for you. Is it age 55, 60, 65? A personal financial plan will calculate the financial resources needed to fund your income needs for the rest of your life. You can then compare this to your present resources to determine how much is needed to fill the gap.

Usually, this brings you back to your business goals. Your personal financial plan tells you specifically what your business needs to do so you can contribute to your investment accounts or sell the business for a specified amount in the future.

How to Keep Score
Most business owners review their financial statements (such as a balance sheet and income statement) on a regular basis. Similarly, business owners should have financial statements to gauge their personal financial health.

One useful scorekeeping tool is the Prosperity Index. While not a substitute for a comprehensive financial plan, it is a quick, easy way to get a ballpark estimate of how you are doing. As the What Is Your Prosperity Index? Table shows, the Prosperity Index is calculated by dividing your net financial assets by your family income. Home equity and personal property are excluded since they are not future income assets.

What is Your Prosperity Index?
Example    Your Situation
Cash, Savings, Money Markets    +     5,000    $____________
Retirement Accounts, IRAs, 401(k)s    +    85,000    $____________
Mutual Funds, Investment Accts    +    15,500    $____________
Life Ins, Cash Value, Annuities    +     2,300    $____________
Investment Real Estate    +    0    $____________
Business Assets (or market value of the business, if known)    +    20,000    $____________
Other Financial Assets (excluding homes, autos, personal use assets)    +    0    $____________
Total equals Gross Financial Assets    =    127,800    $____________
 Less School Loans        -    0    $____________
 Less Credit Cards    -    (4,000)    $____________
 Less Real Estate Loans (do not include
 primary mortgage)    -        $____________
 Less Business Loans, Personal
 Loans, Other Loans    -    (5,000)    $____________
Equals Net Financial Assets    =    118,800    $____________
Divided by Family Income    ÷    67,500    $____________
Equals Prosperity Index    =    1.76    $____________

Next, see how you are doing compared to the age guidelines in the Prosperity Index Table.

Prosperity Index Table
Age    Recommended Score
35 and below    1
40    2
45    4
50    7
55    10
60    13
65 and above    16

So, for a 36-year-old, the 1.76 number in the first table is more than sufficient, but for a 45-year-old it’s behind the curve. The Prosperity Index indicates that an individual with typical income growth, who receives the typical return on investment and puts away at least 10 percent of his or her income toward retirement can reasonably be assured a comfortable retirement income at age 65.

You can use the Prosperity Index to help guide your financial strategies. For example,  business owners with relatively high index scores may want to preserve existing assets by using conservative investment strategies, while those with a low index may need to be more aggressive in order to meet their goals.

Tips for Managing Your Finances
Here are five steps for effectively managing business and personal finances:

•    Incorporate your business. A tax adviser can help you determine whether a C corporation, S Corporation or LLC is best for you.
•    Always keep business and personal finances separate, even if your business is very small.
•    Develop a compensation plan that maximizes net after-tax benefits, including salary, distributions and employee benefits. After all, it’s not what you make, it’s what you keep.
•    For personal-service businesses—meaning the business is you—maximize retirement plan contributions. This has the dual benefit of reducing current income taxes and building a nest egg for the future. Current law allows up to $40,000 annually in a defined contribution plan, though you may also have to kick in hefty sums for your employees.
•    For self-supporting businesses—meaning the business can operate without you—grow your company to its fullest potential and develop a business succession plan. Estimate the business’s current worth and implement a plan to increase its value over time. A CPA specializing in business valuation can help.

The daily demands of running your business may keep you from stopping to consider your retirement options. But, coordinated planning will help you set realistic goals and manage your business finances to get the most personal financial benefit now—and a secure retirement in the future.

Cindy Richey is a certified financial planner with the Prosperity Advisory Group in Overland Park, Kan. She is also a chartered financial consultant and a chartered life underwriter. She may be reached at (913) 451-4501.