The Four Funding Buckets
Business cash flow
Determining where your business’s profit should go is difficult. There is a correct spot for every dollar. This diagram shows how Spokane business owners should be prioritizing their cash flow from the top to the bottom bucket. Each bucket should be correctly filled. Overflowing or underfilling a bucket will hurt your odds of achieving financial security.
Living expenses
Whether or not you’re a Spokane business owner, you have this bucket in some form. It’s the checking account used to pay for necessary expenses. For your personal household expenses, keep 3-6 months of living expenses. For your business, make sure the checking account is sufficiently funded to the point where you don’t need to worry if there’s enough left. Maintain 1-2 months of business expenses in this account. Worry less about micromanaging cash flow so you can focus more on your business.
Emergency fund
Just like living expenses, everyone needs an emergency fund. Business owners need two emergency funds because they have their personal life and business where they could need emergency funds. The rule of thumb for a personal emergency fund is to keep 3-6 months of living expenses. I suggest researching a high-yield savings account on Nerd Wallet’s website.
Business growth
This bucket is prioritized over retirement because as a business owner this is where the incredible wealth creation comes as an owner. As a business, you are either growing or shrinking. This bucket is the fuel that will drive your business. This funding shows you are confident in your ability to grow the business.
As a financial advisor, one of the biggest mistakes I see Spokane business owners make is to let this bucket sit in cash for years. There are two ways this money should be allocated.
Allocate more to your growth and retirement fund. Business owners tend to under allocate toward their retirement funds. If this is you, you could be missing out on tax savings and a retirement planning opportunity.
If you built a large cash position, most business owners don’t realize that the money can be invested within the business. I help my clients park this money in a bond fund where it has limited downside risk, and greater growth than a savings account, but the ability to be liquidated quickly. Talk to your financial advisor to see if opening this account is the best strategy for you.
Retirement
The last bucket to prioritize is retirement. This is the bucket that Spokane business owners tend to overlook because they can be stuck in growth mode. Business owners are incredible at betting on themselves, but when they are stuck in growth mode forever it can become a problem. Almost no business owners fund their retirement solely from their buyout. This means that placing additional cash flow into your business only makes sense up to a point, then adding to a retirement account. Not to mention, putting away money in a retirement account saves taxes, and reduces risk.
Large concentrations of wealth in one place leave you at a greater risk. It’s necessary and natural to have most of your net worth at the of your business. A goal from day one should be to diversify to reduce risk. What happens if you become unable to work, key customers are lost, or the industry becomes obsolete? Find a balance between your business and a retirement account. As you age, the less risky you want to be because you have less time to rebuild if your business goes bust.
Additional investment in your business can cost you more time. There’s a point where the cost of time and stress isn’t worth the additional investment. This cost is especially important if your goal is to start making yourself less essential to daily operations for future succession.
There are a lot of misconceptions about retirement plans. Find out if there is a cost-effective plan that can provide you substantial tax savings for you, your employees, and your business. Contact us to talk to a financial advisor.
About the Author
Noah Schwab CFP® is a financial planner in Spokane, Washington who specializes in helping small business owners with retirement plans and personal finances.
Resources:
· Nerd Wallet’s list of High yield business savings accounts: https://www.nerdwallet.com/article/small-business/business-savings-accounts
