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The 6 Most Important Financial Planning Considerations For Small Business Owners

Updated: Dec 7, 2023

Financial planning is essential for the success of any small business. Owners can take control of their finances and secure the future of their company by ensuring they are on track in all areas of planning for their business. It’s crucial to separate personal financial planning and small business financial planning. Although there are other important considerations, I am sharing what I believe to be the 6 most important financial planning considerations for small business owners.

#1 Cash Flow Management

Cash flow is the lifeblood of any small business, and it is essential to manage it effectively. This includes forecasting and budgeting for revenue and expenses, as well as monitoring and managing cash flow to ensure that the business has enough cash on hand to meet its obligations. It sounds simple enough, but this is where many small business owners tend to think if they just focus on sales, it will work itself out, which often ends in unexpected challenges and frustration. It is important to assess the different borrowing options available for their type of business and research any available grants that are offered for the industry the business operates in. Additionally, it is paramount for an owner to pay themselves first. It requires a degree of discipline that’s not as commonly practiced as one might think. It is common for new business owners to spend endless amounts of hours and cash because they are passionate about their business, and they forget to take some chips off the table.


#2 Tax Planning

Small businesses in Canada are subject to a variety of taxes, including income tax, GST/HST, and payroll taxes. It's crucial to understand these taxes and plan accordingly. Tax planning is an important part of financial planning for small business owners. Small business owners need to understand the various tax laws and regulations that apply to their business, and to plan their finances accordingly. This includes staying up to date on changes in tax laws, taking advantage of available tax credits and deductions to minimize tax liability. There are also options to explore when an owner is deciding how to pay themselves, between dividend versus salary, and how that will impact other areas of the business and the owner’s personal financial situation. There also may be potential income splitting opportunities if family members are involved in the business operations. If the business makes significant capital asset purchases, it’s wise to think about optimizing the timing of those purchases. A major consideration is whether to incorporate or operate as a sole proprietor. There are significant advantages to incorporating such as lower tax rates, reduced liability and access to business loans; however, there are also disadvantages such as increased cost and paperwork.


#3 Risk Management

Small businesses are exposed to a variety of risks, including those related to liability, property, and business interruption. It's important to have insurance in place to protect the business from these risks. This includes purchasing the right types of insurance, such as liability insurance, property insurance, key person insurance and business overhead expense insurance. Continuity planning as a small business owner is incredibly important so the business can weather the storm when unexpected events occur, such as the death, disability, or retirement of a key employee or owner. This includes having a plan in place to minimize the impact on employees, customers, and suppliers. A good risk management strategy will aim to protect the business from financial, internal, external, reputational and operational risks.


#4 Investment Planning

Investment is another important aspect of financial planning for small business owners. They often plan for investments in assets such as equipment, property, or intellectual property, which can help generate revenue and increase the value of the business. Additionally, the business can also benefit from investing in assets such as stocks, bonds, mutual funds, life insurance, real estate and other private investments. It is important to diversify investments and to develop an investment strategy that is appropriate for their business. By keeping funds in the corporation, the business is often able to defer tax since the tax rate is lower than what they would pay personally, but taxation on investment income may be higher. It is vital to understand the liquidity, or lack of, and taxation of their investment decisions.


#5 Retirement Planning

It is never too early to start thinking about retirement, and small business owners should consider this as part of their financial planning. As a small business owner, it's important to plan for their own retirement and ensure that the business will be able to continue to operate without them. This includes thinking about how they can plan for the potential sale or transfer of the business in the future. It also includes developing a retirement savings plan for themselves and potentially their employees. Succession planning, exit planning and estate planning are often overlooked at the beginning stages of building the business when the owner plans to be the owner and operator long term; however, if there is no clear transition period outlined ahead of time, the transition to retirement can take unexpected turns.


#6 Legal Considerations

Small businesses should have a legal structure, such as a corporation or sole proprietorship, that is appropriate for their needs and goals. It's also important to be aware of any regulations that apply to their industry and to comply with them. There are other considerations such as partnership agreements, buy-sell agreements, protection of intellectual property, and employment issues such as contracts. When buying an existing business, there needs to be some clarity on whether they are only buying the assets of the business or are they also assuming the liabilities of the company.


If a small business owner takes the time to plan for each of these six key areas, among others, they will have peace of mind that they are in a position to minimize their risk and optimize their opportunities. This will provide the freedom to focus on what they are passionate about, which is what made them start their small business in the first place. Taking the time to regularly review and update the financial plan to ensure that it remains on track, and to seek professional advice when needed, is beneficial to the owner and the business. The use of professional services is essential to the success of the business, whether you are starting from scratch, buying an existing business or expanding a business already in operation.


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