You have hopes and dreams for your business. You’re focused on providing a high-quality product or service, along with an exceptional experience that keeps clients coming back.
While these “soft” metrics are key components of building a business and a brand, it’s equally important to have a firm foundation of “hard” metrics — like cash flow, costs and profit margins. It pays to have the guidance of financial professionals every step of the way so you can know your numbers and keep your business running smoothly and successfully for the long term.
Which phase of the life cycle is your business in? Identifying its current stage helps you determine what to do next as you take steps to fulfill the vision for your business.
Phase 1: Designing and Planning
You have a business idea you’re passionate about. Next, you need a strategic business plan, which creates a map to follow as you move from concept to implementation. The plan will address all aspects of the business, from determining your target client market to making staffing, marketing, and management decisions.
Financial projections at this stage should cover your first three to five years in business. An accountant can help you calculate how much capital you’ll need for startup, building costs, and equipment, and what you can expect in terms of operational costs, anticipated revenue and profit, and break-even analysis.
If you intend to apply for a loan to get your business started, or obtain funding from investors, an accountant can also help you explore financing options — and assist in compiling a capital financing package to present to the Small Business Administration, financial institutions or potential investors.
Phase 2: Formation
Decisions made early on affect your business’s long-term success — so it’s wise to get advice sooner rather than later from accountants, attorneys, and tax professionals, and to take some time to think through the information they provide. Doing so can help you understand the range of considerations involved in setting up your business and avoid common financial, legal, and tax-related mistakes. For example, you’ll need to:
- Decide how to structure the business (corporation, limited liability company or partnership, etc.)
- Develop an operating agreement
- Choose accounting software
- Create an annual budget
- Form policies and procedures
- Obtain a federal employer identification number, plus relevant licenses and permits (local and state levels)
- Comply with employment laws, payroll requirements, and payroll tax filings
- Purchase business and liability insurance
Additionally, long before tax season starts, find a tax preparer with whom you feel comfortable building a long-term business relationship. Whether you’re looking for an individual accountant or an accounting firm, here are some key points to remember:
- Inquire about the preparer’s background. Make sure the person doing your tax returns has the experience and expertise to understand your business and its complexities.
- Tax preparers have a range of titles, such as certified public accountant, enrolled agent and tax attorney. Ask whether they can represent you if you need to interact with the Internal Revenue Service and, if so, what services they are qualified to provide.
- Details are important when it comes to taxes. Your tax preparer should require that you provide documentation showing revenue, expenditures and other relevant financial information. And your preparer should be knowledgeable about recent tax changes that could affect you. Be sure to review and understand all aspects of your tax returns before signing and submitting them.
Phase 3: Growth
Your business may grow organically, or it might need an infusion of capital to meet expansion goals. Accountants are key players on your business team during the growth phase, because they can help you secure a loan or other funding. Your ability to obtain a loan, and the size of it, will depend largely on what kind of risk your business presents.
Similar to the assistance provided during the startup stage, your accountant can help prepare a proposal for lenders that offers a view into the state of your company’s financial health, states how the money will be used, indicates what is being pledged as security for the loan and more.
Accountants can also deliver the data that tells your business’s story. You’ll know how healthy the organization is financially when you understand its revenue sources, cash flow, available liquidity, and other factors, such as performance relative to its own in previous years and that of close competitors. This information can help you make better business decisions as you move forward.
Phase 4: Sale or Succession
At some point in your business journey, you’ll be ready to move on from what you’ve created. Options include selling the company or creating a succession plan in which family members take over the business.
Advantages, disadvantages, and complex considerations are inherent with each possibility. That’s why having professionals offer expert counsel during this phase is critical. Accountants, attorneys, and wealth management advisers can help you reap the maximum financial benefit possible from the asset you’ve created. For example, how a sale is structured can make a significant difference in what the tax liability from it is — potentially running into the millions for large-scale transactions. Financial professionals may also be able to assist with navigating the family waters. Family members may agree about their interest in owning and managing the business, but disagree about what that should look like. This is a common occurrence in succession planning.
Phase 5: Legacy
You’ve made it to retirement, and now you have the opportunity to enjoy the lifestyle that the wealth you built affords you. Yet there’s still another step in the financial picture: estate planning. What will your legacy be, and how will you ensure that future generations will continue to benefit from your hard work and the smart stewardship of your business?
Estate planning is comprehensive and involves everything from drafting your will to choosing an executor to determine how your assets will be distributed. It also includes health care directives and preferences for end-of-life medical decisions. These decisions, like many that came before, are best made with the advice of legal and financial professionals.
Starting and running a business is a fun and challenging adventure. From the moment you open its doors to the day you step away from it, you’re creating a legacy that will continue to leave an impact on many generations to come.
Cloe Richelle, CPA, JD, joined CB Smith & Associates as a senior tax manager in 2020. She specializes in business and individual taxation, trusts and estates. She holds a master’s degree in accounting with taxation emphasis from the University of New Orleans and a Juris Doctor from Loyola University. Cloe is a member of the American Institute of CPAs, The Georgia Society of CPAs and the Louisiana State Bar Association.