I’ve helped a lot of small business owners create amazing financial plans for their business. To create a solid financial plan for your business, you must create a solid financial plan for yourself first. I will walk you through a step-by-step financial planning process to get your personal finances in order.
If you prefer to watch this same message on video instead of read it, you can watch my video entitled "Financial Planning Starts with You": https://youtu.be/ZGmF_1-Bphs
Most business planning processes start with research on the market, competition, prices, and regulations in your industry. As a veteran business owner and business coach, I can unabashedly say, “While those items are important, they are NOT your first step.”
To create a solid business plan, you first must create solid financial footing for you and your family. It breaks my heart to see a down-and-out person who just got laid off from their job, is in debt up to their eyeballs, has two kids at home, a stay-at-home spouse and is thinking that starting a small business is their path to financial security.
The number one search phrase on Google for small businesses is, “How can I start a business with no money?”
Yes, you can start a business with no money, but you can’t last long with no money. And you certainly can’t succeed with massive credit card debt.
I’ll show you exactly what you can do. I use a personal financial planning process (no I’m not a certified financial planner) to help my clients create a vision of their personal finances before we ever tackle their business plan.
If you complete this plan for yourself, you will have a vision of how to fund your entire life… the lives of your family members… and any thing else that comes your way. Yes, your plan will change as unexpected things happen. However, this personal financial plan can be a foundation for you to eventually create a business plan or find the right job to fund your life’s dreams.
Incidentally, this plan is spreadsheet I have used for many clients and it’s available to anyone by clicking on this link.
Step #1 - Basic Parameters
The first tab of your personal plan is basic assumptions. Enter your current age; the current calendar year; and the months until your next birthday.
Next input, your current savings. If you have current credit card debt, you will need to subtract that debt from your savings. Long term debt like houses and cars is handled differently.
The next two numbers are your best guess. Return on savings is the average amount you believe your savings will grow each year. Conservative savings accounts are earning a ridiculously low 0.2% per year while healthy investment portfolios will conservatively earn 5%. These percentages are “after tax” that means that you may actually make 6%, but due to taxes make only 5%.
Inflation is a roller coaster ride these days. Conservative estimates are 1%. Aggressive estimates are 5%. Something in between is advisable.
The next numbers you can probably keep as they are or change them, but it is the tax rate. A capital gains rate of 25% is somewhat aggressive. It depends on who occupies congress these days. It has been as high as 47% and as low as 20%.
The income tax rate is your net income tax rate after all of your deductions. A good average number is between 20% and 30%. Wealthy people will pay a higher rate; and poor people will be nothing.
Next is your social securing amount. Yes, this is a lot of detail… and it does matter when you start taking social security. If you’re at a loss here, you can guess or consult with an insurance agent or financial planner… or look on the social security administration site for yourself.
Death age is rather obvious… it’s when you expect to die.
The bottom number is calculated… cash at death. If this is a negative number, you have run out of money somewhere along the way.
Step #2 - Expense Budgets
The next tab is your expense budget tab. This is where you enter your monthly budget. Actually, there are four budgets. Why? Because you will have multiple phases of your life that require different expense budgets. When you’re young and single, life is cheap and easy. When you’re married with children, you have to budget all sorts of expenses to support your family. When your kids move out of the house, your expenses drop… unless your kids don’t move out. Then, when you retire, or move into assisted living or require nursing care, your expense budget changes again.
You can put literally anything in this expense category you’d like. Except, for your house payment. We will cover that in the next section.
Step #3 - Housing Investments & Expenses
The house budget is its own animal because it includes expenses and investments all rolled up into one…. Your house.
When it comes to housing, you can rent, own, own a few homes or pay for assisted living.
If you rent, you only have an expense amount. If your rent is $1,000 per month, then put $1,000 in the expense column in the Renting row.
When you purchase a home, you complete the value, debt, interest rate, term, and remaining years on your loan. Do not use the expense column for owning. Your home expenses should be included in your budget.
You can own a second property that has the same inputs as your primary residence.
Rental property means that you’re earning rent from someone else. In which case, you will put the rental income in the income column and the expenses you plan to maintain the rental unit in the expenses column.
Assisted living and nursing homes are pure expenses… just like renting. You should complete this form from your current age until the age you die. … unless you have a plan to go homeless at some point.
The spreadsheet uses all of these inputs to calculate a total expense and income associated with your housing choices that will be forwarded to the cashflow tab.
Step #4 - Forecasting Your Income
If you plan to be a small business owner, this is the intersection of your business plan and your personal plan. If you happen to be a working stiff, this is where you record your income. If there are multiple income earners in your household, you will combine your incomes to show household income.
There are two basic income inputs, “Salary” and “Windfall”. “Salary” is your gross income from your job. If you’re a business owner, you should still have a salary. The “Windfall” column is any income that you plan to earn from equity draws from your business, inheritance from a rich relative, the sale of your business, or winning the lottery. Most people who use this spreadsheet will gradually increase their salary income each year, and will show one time windfall income amounts when they expect them to happen.
Step #5 - Bringing it all Together
You have input your income, expenses and housing investments. Now it's time to bring all of these income and expense amounts together to see the results of your income and spending choices.
This last tab of the spreadsheet is called the "cash flow" tab. Your savings or investment balance is shown. If this amount goes negative, this means that you ran out of money. If that amount is extremely high, it means that you may need to spend more of give to charity.
The investment income column is simply the investment balance multiplied by your expected return on investment for your savings.
Net earned income is the amount from your income tab less paid income taxes.
The housing cost tab is the net income from your housing tab for each year. If you sell a house and move into a smaller house, you will likely see a positive number. If you are paying rent or a mortgage, you will see a negative number.
Next to housing costs are living expenses. This column is showing your annual expenses budgets based on each household budget you’ve completed.
The next columns are large, one-time expenses that are spent outside of your regular expense budget. You can include whatever you’d like here. The items I’ve included are travel, vehicle expenses, college for the kids, wedding costs, and furniture. These expenses often happen infrequently and need to be considered separately from your ongoing household budget.
The net income is the total of all income and expenses for each row. If you’re spending more than you’re earning in any one year, this number will be negative. If you’re earning more than you’re spending in any one year, this number will be positive. Positive net incomes will be added to your investment balance, and negative net incomes or losses will be deducted from your investment balance for the next year.
What do Your Personal Financial Plan Results Mean?
Wow! That was a lot. So, what does all this mean?
To insure you have solid financial footing, your investment balance should not drop below zero. If it does, you know that bad things happen. If your investment balance is negative, you may can try to reduce expenses in your expense budgets, or housing costs. You can also increase your income.
I will also warn you to not allow your investment balance to rise too high. If your investment balance is way high and you have tens of millions of dollars when you die, you may think about changing some things about your life. Yes, you can leave your kids a lot of money when you die, if that’s what you want to do. But, most kids may want you to spend more time with them while you’re alive… or not.
The purpose of this personal financial planning exercise is to balance your desire to achieve and earn money with the way you want to live your life.
A typical life in the modern U.S. is starting out rather poor, making some money, then starting a business to invest your savings, making a lot of money, and paying for a family, vacations, or whatever else, giving to charity as you prosper… (10% of your income if you’re asking me). And die with enough money to pay for your funeral and a little extra for your kids.
When I do this personal planning exercise with small business owners, they have the knowledge to set reasonable business profitability expectations, hiring plans and pricing their products and services knowing exactly what they need to live the life they want.
Once again, this spreadsheet is yours by clicking on this link.
I hope you’ve learned how to create your personal financial plan. Once again, I am NOT a certified financial planner… but I’ve made some amazing financial plans for my clients.
You can visit my website at www.mmbizcoach.com .