If you're putting all of your remodeling dollars into your business, here are two words of advice: Remember Enron!
Improving your financial ratios and running a smarter business are done for the same purpose: to put more post-tax dollars into your pocket. If you're not putting excess post-tax dollars into your pocket, beware! And if you're not making sufficient post-tax dollars to have excess, you'd better really pay attention. It's time to talk about pouring business profits into your personal financial foundation.
For owners running successful remodeling companies, consider the following as an introductory road map to diversifying and solidifying your personal finances. For those struggling to run a successful company, consider what you're missing and use that knowledge as motivation to run a more profitable company.
1. First, prepare your personal balance sheet, preferably with your spouse. Do your assets exceed your liabilities? Are you accumulating wealth to be used later in life when your cash flow from work ceases? What do you own, and what do you owe? Don't forget to include the assets and debts of your remodeling business. It's your company, and the net of those assets and liabilities is part of your personal wealth.
2. Next, analyze whether you have the most likely catastrophic events covered. Do you and your spouse have the appropriate amount of term insurance? Term insurance is far more cash-flow-friendly than whole-life insurance. Does your family have ample health insurance? Do you have assets set aside in the proverbial "rainy day" fund?
3. Even if you're young, start thinking about retirement. If cash flow from your business allows, set aside some profits in a company-sponsored retirement plan. Accumulating pretax dollars in a retirement plan is a great way to save money, and sponsoring a retirement plan can help you retain employees. If they're not worthy of the extra expense of a retirement plan, why do you still employ them?
If cash flow does not allow for a companywide retirement plan, set aside post-tax dollars in an individual retirement account for you and your spouse. By doing so, you will accumulate funds to be used in retirement. They probably won't be sufficient to fund retirement, but it's a good place to start.
4. Determine the next significant hurdle your family has to face and calculate its cost. If you have children, for example, college lurks. Because of the extraordinary cost of a college education, setting aside dollars for college on a regular basis is mandatory if you want to give your children an opportunity to attend even a public university. Look into 529 Plans, starting with the one offered by your state, because some state plans offer tax benefits to in-state participants.
5. Determine how you will accumulate other dollars for long-term growth (i.e., investing) purposes. If your monthly household income is insufficient for your cash flow needs, consider making a change. If dollars are available but are being misspent, consider a budget.
6. Finally, find outside help. Most people have little interest in their personal finances and need more expert counsel. If that is your predicament, consider retaining the services of a fee-only financial adviser on a fixed-fee or hourly basis. Not all planners work with only high-income clients. Meet with a planner, get a good third-party look at your personal financial situation and begin implementing a plan to make you and your family financially solvent. After all, isn't that why you're running your own business?
Stan Ehrlich can be reached at firstname.lastname@example.org.