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In recent years, it’s been historically difficult for small businesses to plan for the future. In just the past few months alone, economic curveballs have included labor shortages, strikes, inflation, and rising interest rates, to name a few. Though planning can feel futile in the face of such headwinds, it is still among the most effective ways to protect your small business during seasons of change.
With all your key numbers from the recent tax season in front of you, it’s an ideal time to start planning and considering your small business’s future. When you first begin to dig in, it can seem overwhelming, but if you direct your focus to three main areas it will set not only you but your business, up for success in the year to come.
Create a financial roadmap
The best place to start planning your business’s future is with a strong financial plan. Not sure where to begin? One way is to connect with an expert, such as a wealth management team, to help map out and subsequently monitor your progress over time.
It’s easy for future planning to feel less urgent than other issues that arise as a small business owner. After all, actively running a business is a constant exercise in problem-solving. But in the long run, having a solid plan for the future is the best thing you can do for yourself, the business, and your family. If you choose to work with a wealth management team, they’ll likely start by creating a comprehensive plan that measures your assets and liabilities and then forecasts the outcomes for both your personal and business growth over time. This holistic, time-horizon view will give you an idea of what your business can expect to do in the upcoming year and how any potential deviations might impact your projected earnings and performance.
Set yourself (and your team) up for success
Once you have a strong financial plan for your business in place, it’s time to start thinking about you and your team members’ personal financial futures. As a business owner, based on the 2023 401(K) contribution limits, you have the ability to invest $22,500, with profit sharing, into your personal retirement plan. When it comes to taking care of your employees, there are a plethora of 401(k) plan features to choose from. Some of these options include:
- Safe Harbor: This popular 401(K) plan is intended to help business owners maximize their annual contributions by automatically vetting them to ensure that highly paid employees are not unfairly benefited in a top-heavy way. In order to qualify, the business must contribute one of the following:
- Matching Contribution: Either a 100% match on the first 3% of deferred compensation plus a 50% match on deferrals between 3 to 5% or making a more generous match often equating to a 100% match on the first 4% of deferred compensation.
- Nonelective Contribution: 3% or more guaranteed match of compensation, whether or not the employee contributes.
- Roth: This type of plan allows your employees to make salary deferrals, after taxes, and at their own discretion.
- Automatic Enrollment: You can automatically enroll your employees that do not opt to make a salary deferral on their own. This encourages participation, which helps your business qualify as a Safe Harbor plan.
- Profit Sharing: This option allows the business to give a contribution to any plan participant, regardless of if they make a pre-tax or Roth deferral.
- Discretionary Match: The business can match a percentage of deferrals, whether they are pre-tax or Roth, for its employees.
Secure your future
Though it’s not a pleasant topic, a large part of planning for the future involves deciding what happens when you’re no longer here. Linked to protecting your business’s future is securing your own future, and with all your documents now in front of you, it’s a good time to review your will and make any necessary updates.
How does this pertain to your small business? Under the current federal tax law, you can gift items or businesses to your beneficiaries, either while you are here or through your estate. Keep in mind these rules are subject to change, so it’s wise to consult with a professional before making changes to your plans. It is also important to make sure you regularly review and update your trust and estate plan, especially if a large transaction might be in your future.
While the world continues to change rapidly around us, the best thing you can do for your small business is to have a plan for the future. Connecting with wealth management professionals allows the heavy lifting of gathering all your information and putting together a comprehensive financial plan to be taken off your shoulders. That way, you can put more energy into your business with peace of mind knowing your future is secure.
Greg Garone is Wealth Advisor, Tompkins Financial Advisors, Western New York.
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