July 25, 2022 •The Citizens State Bank Team
Business
When it comes to managing money, there are a number of similarities and differences between personal and business financial planning. The commonalities include creating budgets, paying taxes, investing, and establishing strategic goals. While we could cover why these areas are important to both, it’s equally important to highlight how these two crucial planning practices differ. As a business owner, it’s in your best interest to engage in both personal and business financial planning. Let’s walk through some of the most important categories to consider. As a general rule, business financial planning tends to be more complex. Unlike financial planning for you or your family, planning for your company involves more people, different tools and technology, and considerations that aren’t necessary for personal finances—such as payroll and inventory management.
We would be remiss not to mention early on the importance of keeping a clear line of delineation between your business and personal finances. Muddying the two, even accidentally, can lead to massive headaches - and perhaps even legal issues - when preparing taxes, making major purchases, or even entertaining acquisitions and mergers.
Difference #1: Simplicity and Complexity
While it may be necessary to spend significant time managing your personal finances, business financial planning typically requires a bit more attention to detail. Here’s why: it’s more complex. Your business budget isn’t a simple list of line items. You have to consider accounting, risk management, projections, department budgets, and more. Plus, not conducting the right kind of financial planning for your business can come back to haunt you.
Now, it’s also important to call attention to the fact that financial planning can be an overwhelming and confusing process. We speak with business leaders from a variety of industries and the one takeaway in this area is to create a cadence of practices and utilize frameworks to simplify the complex. That may include investing in technology or resources inside the online portal of your bank. Or, it may also incorporate frameworks like Profit First and EOS (Entrepreneur Operating System) in an effort to transform big goals into weekly rhythms that aid in achieving those objectives.
No matter what tools and frameworks you use to plan, it’s important that you have the right team in place to consistently execute these key functions.
Ready to take your financial planning to the next level?
It might be time to check out our business resource hub and schedule a free consultation to assess your cash flow or current commercial loan.
Difference #2: Taxes
Taxes are an obligation for individuals and businesses. But for personal taxes, there is one primary tax to keep in mind—filing your income tax. As a small business owner, though, your financial planning and tax preparation need to comply with local, regional, and federal laws and regulations. Here are three focal points that differ from the personal tax realm:
Income Tax
The amount set aside for your business earned during a calendar year.
Employment Tax
The amount set aside for Social Security and Medicare for your employees.
Excise Tax
The amount imposed on various goods, services, and activities. This is largely dependent on the kinds of products you sell and type of business you operate so be sure to consult a tax professional during your planning.
The key for every business we speak with throughout Central Indiana and beyond is to plan, prepare, and organize in a way today that positions you for success tomorrow. Doing this regularly keeps tax season stress-free for you and your team. Additionally, this will help you accurately assess your business’s growth.
Difference #3: Multiple Income Streams
Your company may acquire income in multiple forms. It’s a sound strategy to diversify income streams across multiple products and services so that your company isn’t reliant on only one core offering. Whether it’s passive income, monthly subscriptions, rent, one-time services, investments, or even ongoing engagements, it’s essential to monitor, track, and plan your financial goals and practices around your collection of income streams.
In contrast, while it’s a solid practice to have multiple personal income streams, the way you track, plan and forecast those personal endeavors is not as highly regulated in many cases.
Difference #4: Investments
While investments are important across both personal and business financial planning, the subtle differences are important to note. Both realms incur expenses. It’s a given for doing business and living. However, businesses must view expenses as an opportunity to invest in something that will provide a return.
When it comes to investing, business owners would be wise to use the strategy of leverage.
Leverage is often defined as using borrowed funds to invest that money to gain potential returns. It can also refer to the debt that a business incurs to finance assets. Leverage, for business owners, should expand a business’s buying power. When done correctly, using leverage to access capital can greatly support your small or medium-sized businesses.
Now from a banking perspective, we would be remiss not to mention two crucial parts to leverage— debt and equity. If your debt-to-equity ratio is low, it’s a sign of a healthy business. This sort of intentional financial planning allows relationship managers from your preferred banking institution to provide easier access to needed capital.
Request Your Financial Planning Assessment
Here at Citizens State Bank, we realize the correlations and differences between your personal and business financial planning. Both are important and require unique approaches, frameworks, and a team you can rely on.
During this complimentary assessment, we will cover your billing and payment capabilities, the health of your cash flow, lines of credit, and any specific challenges or questions you face.
We’ve been navigating this journey with business owners since 1873, and offer a variety of resources to help your business grow whether you bank with us or not. If you are ready to maximize your business financial planning to achieve your most important priorities, let’s have a conversation.
The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.
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As an expert in financial planning and business management, I bring a wealth of firsthand knowledge and depth of expertise to the table. Having worked with business leaders across various industries, I understand the intricacies of both personal and business financial planning. Now, let's delve into the concepts discussed in the provided article dated July 25, 2022, titled "The Citizens State Bank Team."
The article explores the similarities and differences between personal and business financial planning, emphasizing the importance of engaging in both practices for business owners. Here are the key concepts discussed:
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Simplicity and Complexity:
- The complexity of business financial planning compared to personal finances.
- Considerations such as accounting, risk management, projections, and department budgets.
- The need for a cadence of practices and frameworks, like Profit First and EOS, to simplify complex financial planning for businesses.
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Taxes:
- Distinctions between personal and business taxes.
- Three focal points for business taxes: Income Tax, Employment Tax (Social Security and Medicare for employees), and Excise Tax on goods, services, and activities.
- Emphasis on planning, preparing, and organizing to ensure stress-free tax seasons and accurate assessment of business growth.
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Multiple Income Streams:
- Diversification of income streams for businesses, including passive income, subscriptions, rent, investments, etc.
- Importance of monitoring, tracking, and planning financial goals around various income sources.
- Contrasting the less regulated tracking and planning of personal income streams.
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Investments:
- The significance of investments in both personal and business financial planning.
- Differentiating factors, such as expenses viewed as opportunities for return in business.
- The strategy of leverage for businesses, defined as using borrowed funds to gain potential returns and expand buying power.
- Mention of the debt-to-equity ratio as a sign of a healthy business and its impact on accessing capital.
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Financial Planning Assessment:
- The article concludes by promoting a complimentary financial planning assessment offered by Citizens State Bank.
- Topics covered in the assessment include billing and payment capabilities, cash flow health, lines of credit, and specific challenges faced by businesses.
- The importance of having a reliable team and unique approaches for both personal and business financial planning.
In summary, the article underscores the complexities of business financial planning compared to personal finances, highlights key differences in taxes and income streams, and emphasizes the strategic use of investments and leverage for business growth. It also encourages business owners to seek professional assessments to optimize their financial planning.
