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welcome. This is Financial Survival Network. I'm your host, Carrie Lutts.
Well, we got a recession. If it's not here already, it'll be
here very shortly. And basically, what do you do to prepare for it?
If you are a business owner, how do you get ready for what's
about to hit? And Grant Let's says with us the grant, you're a
financial planner and you work with the small businesses in money management, in retirement
planning, in cash flow management, etc. So let me ask you a
question. Is the recession coming? You know it? Probably you know you
as you as you put it. You know we might be there already if
you look at all the numbers. We're not quite there, but things seem
to be slowing down a little bit. What we're doing with our clients at
this point and just to provide our listeners a little bit of context. I
run a financial planning firm. We work with business owners to help them optimize
cash flow, reduce taxes, and invest prudently. And so for that demographic,
a lot of small businesses really struggle with how to handle their cash,
both in good times and bad. And I think a framework that really works
well for business owners in any economic environment is probably applicable now. And regardless
of whether we're headed into a recession or not, or whether we're already in
one or not. I think everybody needs a good framework for handling cash,
and I can describe what that is if that's helpful, but from my perspective,
the how people handle that is kind of irrelevant. You need an operating
model that's going to work when the economy is working in your favor and when
it's not, because that's simply something that's not in our day to day control.
So a lot of this comes down to how your business is organized.
If you have a pass through entity, either a sole proprietorship or an LLC
or an S corporation, it doesn't matter from a tax perspective whether cash in
your company's bank account stays in the bank account at the end of the year,
or whether you take it out and pay yourself. And one thing that
I think a lot of small businesses struggle with is when do I take cash
out, how much do I pay myself? How much do I leave in
the business account for operating purposes? And I think of it kind of as
an emergency fund. The financial planning one on one for your personal finances,
you need to start with a little bit of cash in his savings account available
to you for a rainy day, so that you're not compelled to dip into
your retirement accounts or your investments at an inconvenient time when the market is down.
The same goes for your business, and I think most businesses should probably
shoot for somewhere between three and six months worth of operating cash. So,
if you pull your profit and law statement from QuickBooks or your bookkeeper, and
you look at your ordinary monthly operating expenses, how much does the business need
to survive? Multiply that by somewhere between three and six based on your comfort
level, that's the amount of cash you ought to have in the business.
And so the kind of long winded way to get back to your question carry
is is I think i'd start with how much cash do you need for your
business the emergency fund, and if we're expressing it as a function of your
monthly operating expenses, if you're concerned about the fact that we might be headed
into a recession, if your ordinary emergency fund is three months worth of operating
expenses, well then you might let that swell to four or five or six
in preparation of revenues drying up a little bit. Obviously, the other things
you can look at are reducing those operating expenses or maybe changing your contracts with
vendors to allow for you to pull back on those expenses a little bit if
times could really get tough. But really, I think the core framework ought
to revolve around how much cash do you have in the bank. If you
have more than that amount of three, four or five six months worth of
cash, that's when you think about pulling it out into your personal bank account
and doing something else with it. Right, And when it comes to like
receivable management, you know recessions coming, you know there's potentially going to be
a cash shortage, and it's going to be harder for your clients to pay
you. So maybe it's a good idea to put in incentives to get paid
up front, to limit your extension of credit to all only those who are
the most credit worthy, and that can help you get through it as well.
Right, A great point. Yeah, this varies a lot by industry.
You know, receivable management is more important in some industries than others.
But yeah, I think we probably have to lower our expectations of how much
of those receivables you'll be able to collect, and the more cash upfront that
you can get, the better. And if the effect comes from some kind
of an incentive program, maybe you reduced your prices a little bit for people
who are willing to pay all up front, or your only extending credit to
the most credit worthy the organizations. That that's another great avenue to consider,
right all right, So where do you think most business owners go wrong?
You deal with a lot of business owners. Tell us where do they go
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to throw now more than member. A lot of it has to do with
the cash management, a lot of it has to do with tax planning in
their own personal financial planning. So the biggest, the biggest mistake or the
big misconception I see is proprietor or entrepreneur goes out and starts this business and
they assume that if I pour everything into the business and can make it a
success, by definition, I will be financially successful myself. That definitely helps,
right. Entrepreneurship is a wonderful lever of wealth building for a lot of
people. It's a great way to become financially successful, but it is not
an inevitability. You still have to do the work and put some money away
on your own diversify out of the business in order to be financially successful yourself.
So that's over and over and over again. That's where I see people
go wrong, is they put their own personal financial planning for themselves and their
families on the back burner because they think that if I just focus everything on
business success, throwing cash into the business, and if I can just make
that part work, then I will inevitably, inevitably be financially successful. And
that's just not a guarantee. And I've made that very same mistake myself,
grant and so. But it's hard to convince people you're on a mission.
You're going to build your company and once it succeeds, then you're going to
benefit from all the trappings of success. But you need to plan for success,
don't you Exactly you speak from experience. Carry's I'm not saying that people
should not focus all their attention on building the business and making it successful,
because that will be a wonderful lever of your future success, but just keep
it in the back of your mind that that's not the only thing that has
to happen. And at some point, when you get some momentum and make
that start to make that thing profitable, you're gonna have to put some more
mechanisms in place and pay attention to your own personal objectives to make sure that
you're on inadequate trajectory. And oftentimes, some really great mechanisms for that are
a qualified retirement plan in the business. You can set up your own four
oh one K. It's a great benefit for employees, it's a great retention
tool, it's a great way to put money away, a tax deferred basis.
Other benefits that you can put in place in the business that will benefit
yourself that an ordinary W two employee you may not have access to. You
There are a lot of avenues, there are a lot of arrows that you
have in your quiver. And I think that's exactly right. You know,
you do need to focus all your attention on making this thing successful first.
Just remember that there's other stuff you have to do at some point along the
way, all right, so you have the plan for success. I mean,
I think that really is key, and that means different things to different
people. In your travels. Here, what's the biggest mistake so one of
your clients make. I've seen people make six figure tax mistakes in the past
with regard to you know, specific retirement plan rollovers, putting the wrong amount
of money in the wrong account. There are a lot of technical things that
will tend to screw up that cost them a lot of money. I've also
seen people not put cash into the company four one K plan when they were
compelled to by the way it was set up, and so they have to
pay a bunch of back penalties and taxes, and that's a huge cash flow
suck. If you've if you head down a wrong path. Let me put
it this way, if you make a commitment in the business to establish something
like a four oh one K or a simple IRA, you're making a commitment
to putting in a little bit of money on behalf of your employees. And
if you forget to do that or get headed down or wrong the bad path
where you don't have the cash to do so, that can compound and really
run you into trouble. And I've seen a number of those cases over the
years, and it's cost people multiple six figures. If you do it wrong.
Yeah, that can be costly. All right, great, well,
we really appreciate your coming on. Can you just tell us your website how
we connect with you on the web and find out more. Sure, Yeah,
we're all over the place. You can check out three Oakswealth dot com.
That's spelled out. It's our financial planning firm. I have a blog
I write on it's called Above the Canopy Above the Canopy diet Us. And
we've I've got a podcast where we talk about this stuff as well, called
Grow Money Business. So google any of that stuff and we'll pop up.
Excellent. And if you've got a question for a Grant, shoot me an
email k l at carry Lutz dot com. Make sure you go over to
the site to the show notes. You can click the link and you'll get
right to Grant's site to three Oaks and Grant. Appreciate you coming on.
We'll talk to you again soon. Thanks for having me, Carrie. That's
great, Thanks for listening to Carrie Lutz's Financial Survival Network, your solution to
today's trying times. For the latest, go to Financial Survival Network dot com.
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