“Small-business owners are like fighter pilots,” says Jim Chilton, founder and CEO of the nonprofit Society for Financial Awareness (SOFA). “They take much more risk than other people.” SOFA offers free training in financial literacy for individuals and small-business owners.
“If you don’t do planning, you will have a world of financial blunders,” Chilton says.
In honor of Financial Literacy Month in April, Chilton shares some ways entrepreneurs can improve their financial picture.
1. Plan for Retirement
According to Chilton, 28 percent of self-employed people don’t do anything to plan for retirement. “You retire and it’s too late,” he says. “You’re too old, you’re too tired, you’re worn out.” He advises projecting ahead. Figure out when you would like to retire and your life expectancy, then calculate how much you need to put away each year to retire comfortably. “That is the biggest eye-opener there is to self-employed people,” he says. He notes that a Simplified Employee Pension Plan or SEP IRA, where you can put away up to 25 percent of your income, is a good option for small business owners. “A SEP IRA is a business expense, dollar for dollar that gets to be taken off your taxes… but it’s paying yourself,” he says.
2. Invest for the Future
Whether you want to save for your children’s college or a new home, Chilton advises creating a long-term saving and investment plan. “Don’t put all your eggs in one basket,” he says. “Having five savings accounts at the bank is not being diversified.” He suggests investing in several different classes of assets, such as real estate, stocks, or bonds, to create a balanced portfolio.
3. View Tax Time as an Opportunity
Chilton describes Schedule C as “one of the most lucrative areas for a successful small business.” To take full advantage of what he calls a “phenomenal amount of room” for deducting business expenses on Schedule C, Chilton advises planning ahead. He suggests meeting with a tax adviser mid-year, not just at tax time. “It’s not about making money,” he says. “It’s about keeping what you make.”
4. Prepare Your Business for Transitions
Chilton encourages all small-business owners to set up transition plans that include estate planning. As much as we’d rather not dwell on it, we’re all going to die. “If you knew with 100 percent certainty that something was going to happen, wouldn’t you make a plan about that?” he says. Wills, trusts, and other estate planning documents can help create a blueprint for the smooth transition of your business when you are no longer running it. “It’s time to replace fear with planning.”
5. Take Full Advantage of the Professionals Who Work for You
Chilton calls professional advisers, such as financial planners, lawyers, and accountants, “the experts who will help grow your business.” He encourages entrepreneurs to seek professional advice that will help them achieve greater return on their investment in every area of their business.
Don’t overlook your bookkeeper, either. “Most people don’t use the full potential of a good bookkeeper,” Chilton says. “A bookkeeper can either be a scribe and not open their mouth and put numbers in boxes, or they can tip you off to trends in your business.”
Chilton says he hopes National Financial Literacy Month will be an “alarm clock” that wakes up small-business owners up to the need to plan ahead financially. After all, he says, “There’s more to being an entrepreneur than making money.”