Employee benefits and retirement plan solutions Trends and Insights 5 steps to creating a financial plan to help your business withstand bumpy times

5 steps to creating a financial plan to help your business withstand bumpy times

From cash reserves to financial professionals, these key steps can help your business navigate a crisis and build long-term resilience.

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5 min read |

Inflation and recession continue to loom in news headlines. Businesses and employees alike say their top two concerns are inflation and the overall stability of the U.S. economy.1

But the past few years have provided business owners with the lessons they need to prepare, says Amy Friedrich, president of Benefits and Protection for Principal®. One is the need for long-term financial planning that gives your business the flexibility to handle volatility.

These five steps can help.

1. Establish a crisis plan. 

“Business owners—small business owners in particular—are so often absorbed in the moment because of the all-consuming nature of their work,” Friedrich says.

Take a minute to pause, she says. Ask yourself: What insights have I gained over the last few years, and what do I want to do differently moving forward? Would you:

  • Set aside more money?
  • Take care of your employees differently?
  • Trust different sources of information?

One thing most business owners don’t plan to do: Reduce workplace benefits.1 This could serve you well for retaining your strongest talent: Employees are already boosting their emergency funds and adjusting their budgets—and half say they will not decrease their retirement savings rate if a recession hits.2

Perhaps most important: Cultivate a support network to lean on when business is going well—and when things get bumpy. “Invest the time to build up connections in your local or regional business community,” Friedrich says. “As you take care of your finances and employees, you can benefit from the support of your peers.”

2. Create a business succession plan.

The first step to a successful business succession is answering the who, what, and when: Who do you want to sell your business to, what’s your business worth, and when do you want to sell?

Set a realistic timeline and lock it in place through a well-funded buy-sell agreement.

A solid agreement will:

  • identify a buyer and fair price,
  • outline the next generation of business management,
  • protect employees, customers, suppliers, and creditors during the transition, and
  • establish an accurate value for the business.

Give yourself time to adjust. Those extra years may allow you to balance the right successor while ensuring you’ll have ample income after you leave the business.

3. Get a business valuation regularly.

A business valuation is crucial to determine lines of credit, acceptable debt load, and even the timeline for selling your business.

If a surprise event forces you to sell, you or your successors—or both—could end up frustrated if the value of the business is a shock.

“Knowing the value of the business is the foundation of planning,” says Nate Schelhaas, senior vice president of Benefits and Protection and head of the business owner segment at Principal. “A business owner can have all kinds of great ideas, but they’re worthless if the owner can’t put solid numbers to what they really mean for both owner and buyer.”

Not sure where to start? Reach out to your financial professional who can connect you with a company like Principal that routinely provides informal business valuations.

4. Connect with a trusted financial professional. 

Businesses in nearly every industry rely on technical experts—CPAs, attorneys, etc.—for essential functions. The role of financial planning, especially during economic volatility or a downturn, is part of this outside expertise to help your business succeed. A financial professional can help offer solutions for you, your business, and your employees.

As you’re running the day-to-day business, they can offer support for long-term planning.

The most critical component: Trust, says Friedrich. “It’s your job as a business owner to go through a deliberate process when you look for a financial professional, and it’s their job to earn your trust.”

When seeking the right medical doctor, you likely scrutinize and screen your options. Do the same with financial professionals—for the health of your business and personal financial future.

5. Build up cash reserves. 

Stockpiling cash in the boom years may help you avoid risking your personal finances by, for instance, taking out a second home mortgage for your business. Half of business owners already have set aside reserves to cover operating expenses for three or more months, according to Principal research.1

The old rule of thumb was a six-month cushion (a threshold met by 23% of businesses in our survey). But the past few years have shown us that crises can last far longer than that. Everything businesses have endured is an argument for doubling down.

“The worst-case scenario?” Schelhaas says. “You have a year’s worth of cash reserves and don’t need it.” (That’s true for just 9% of businesses in the survey.)

If you must tap into other emergency cash, “evaluate all the sources of cash at your disposal and in which order it makes sense to use them,” Schelhaas says.

One common forgotten source is the cash value of a permanent life insurance policy. While the main purpose of life insurance is to provide a death benefit, the cash value in some permanent life insurance policies can be used during your lifetime.

What's next?

Get simple, powerful tools and resources to drive your business forward at principal.com/business.