In today's episode, we're delving into the essential financial fundamentals that every business owner should have in place to achieve financial independence and long-term stability. It's a Financial Planning 101 for business owners, designed to provide you with the tools and knowledge you need to build a strong financial foundation.

Discover why profit margins are crucial and learn how to calculate this vital number effectively. We'll also cover the importance of establishing an emergency fund designed to tackle unexpected financial challenges that may arise in your business journey, the benefits of diversifying your investments beyond your business, and more.

Listen To The Episode:

What You’ll Learn:

• How to calculate your profit.

• The importance of knowing how much your profit is.

• Why having an emergency fund is essential.

• What “catastrophe” coverage entails.

• The importance of having an estate plan.

• Why diversifying your portfolio is always a great idea.

Ideas Worth Sharing:

• “Creating margin is hugely important in order for your business to be around long term and for you to be able to do what you want to do.” - Eric Maldonado

• “Having some cash put aside that is meant for your business in case of the unexpected will give you more peace and allow you to bring your best self to your business.” - Eric Maldonado

• “Having something to invest in outside your business helps to protect and diversify your portfolio. This way everything isn’t wrapped up in your business.” - Eric Maldonado

Resources:

• Eric Maldonado, CFP®, MBA: (805)250-4552 | info@aquilawealth.com | Website | Contact Us

• Profit First by Mike Michalowicz

• Sign Up For The Newsletter

Disclosure: Aquila Wealth Advisors, LLC is a registered investment advisor in the state of CA, LA, and in other jurisdictions where exempt. All content on this podcast is for information purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.

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Read The Full Transcript:

Business owners are the backbone of the American economy. Business ownership is one of the best ways to generate wealth and create financial freedom for you and your family.

Welcome to the Aquila Wealth Podcast.

Listen in as we tackle the challenges of entrepreneurship, and share how to remove financial procrastination and find freedom from financial stress.

Your host is Eric Maldonado, founder of Aquila Wealth Advisors, LLC in San Luis Obispo, California. He is a fiduciary financial advisor and a certified financial planner.

Aquila Wealth Advisors is a fee-only, commission-free financial planning firm focused on helping business owners maximize profits, positively impact their community, take care of their family, and achieve financial freedom.

Here's Eric.

Eric Maldonado:  Hi there, folks. It's Eric Maldonado, owner of Aquila Wealth Advisors, located in San Luis, Obispo, and I'm a certified financial planner. And today, we're talking about ways to never have to shut down your business.

So, I've heard the adage, the only way to lose is to quit. And with business ownership, in particular, if you can just keep going year in and year out and start taking advantage of the power of compounding, the real accomplishment is never stopping or never quitting, and never having to shut down your business.

So, today, I'll give my top 10 tips for never having to shut down your business from a financial planning perspective.

And before I go into it further, I'll give my obligatory disclaimer as a financial planner and a fiduciary; this is not meant for individual advice, it's merely education and information. So, always consult with your financial professional first.

So, number one on my top tips or top ways to never have to shut down your business is to start with the end in mind.

In other words, design your business in a way that you never want to stop working because you enjoy it, and you do the things you like to do. And you might hear that and say, “Well, that's easier said than done.”

But I would say people, we tend to underestimate how much we can accomplish in 10 years. And if this business is something that you want to do for the rest of your life, wouldn't it be worth making it better year after year until you get to the point where in 10 years, it's like, “Wow, this is amazing. This is exactly how I've envisioned it, and this is how I want it to be?”

But if you didn't start with some sort of vision or some sort of a strategy or design in mind on how you want your life to look while running the business, it's tough to get there because you don't know where you're going.

And then the other part of that, as far as the 10 years, we underestimate what we can do — the other part is we tend to overestimate how much we can do in one year. We tend to give ourselves a little bit too much credit on how much we can accomplish, especially with something as complex as a business. There's typically a lot of moving pieces.

So, give yourself some leeway, if you will, and give yourself some time to improve it.

So, that's more of an overarching concept or thought when it comes to never having to shut down your business, have it be set up in a way where you just enjoy it and then the work you're doing isn't burning you out and you don't feel like you have to feel so stressed all the time, or like you're running on E, on empty by the end of the week or by the end of the year.

Number two, this is more about ensuring for the catastrophic possibilities. So, just having the basic insurances and just chalking it up as a cost of doing business, whether it's business liability or an errors in emissions insurance. These days a lot of businesses need to protect from a cybersecurity situation.

So, whatever are the main areas in your business that if something were to happen that it would be wiped out, that's what you need to insure for. And basically, give the insurance company the risk in trading them hopefully, a reasonable monthly premium in exchange for them covering you.

So, maybe they give you a million dollars if something happens in your business, someone trips and falls, or you make a mistake of some sort in your day-to-day service. And in exchange for that, it costs you maybe, I don't know, a hundred bucks a month to pay the premium. I’m just using made up numbers.

But having just the right insurances, it's worth it to make it official and formal in your business proceedings. And then outside of the business insurance, you might as well just get your personal insurance set up. So, that would be like just a basic term insurance policy.

So, if something happens to you, your family's taken care of, ideally you have a disability income policy especially if you're between the ages of 30 and 50-years-old, the probability that a disability happens, God forbid, is higher than the probability of a death.

So, term insurance is insurance per death for your beneficiaries and we tend to get that more than … before we get disability insurance, even though it's a higher probability that we get injured and now, we can't maybe work or provide for ourselves or for our family or for our business in the way that we want.

So, getting some sort of disability insurance is another way to never have to stop the business, to never have to roll it up and shut it down, or just have to sell it or exit not on your terms.

Of course, if it's an exit that you prepared for and you planned for and you get a multiple of revenue or income that you are happy with, that's different. But I'm talking about being able to keep the family business if you want to keep it long-term and have it be even a generational opportunity, legacy planning-wise for your family.

Number three is more related to debt. So, if possible, avoid relying on a business line of credit as your regular seasonal rhythm of managing your business and taking care of it, the expenses that you need to.

Of course, there's exceptions and especially, if you're listening to this and you're already using a business line of credit or utilizing debt in general to make payroll or to carry over from month to month. This isn't meant to make you feel guilty or shame, it's just more having the strategy or plan to eventually not have to use that as part of your regular rhythm.

It's okay to have access to a business line of credit or some sort of a business loan, if that makes you feel a little bit more safe or secure, just to know it's there. But getting to the point where you don't have to use that as your regular monthly rhythm of cashflow will really help you have a business that lasts forever, lasts long term, lasts decades until you either want to stop or finish on your terms, or transition to the next generation ,or the next buyer.

So, we'll talk more about how to do that, but overall, it's just creating that intention and that goal, that desire to not want to use the business line of credit.

Number four is expanding your business on your terms in the way that you want to expand it, and not doing it because other people are telling you to expand or grow, whether that's hiring employees or having more locations in your business, more buildings.

Being able to grow and improve your business in the way that you want to, and that feels right for you based on your experience. Because no one knows your business as well as you do.

Bankers don't know as well as you do, investors, people trying to sell their product — vendors that are trying to work with you from a business-to-business perspective. They might encourage you to do things or give you some ideas, but ultimately, you have to be the one that's comfortable with the growth.

So, kind of relates to number one, where you're expanding your business with the end in mind on how you want to end up ultimately, in the long run. Do you want to have this enterprising type business with multiple locations or a franchise or licensing or just kind of grow, grow, grow?

Or do you want it to be more of a business where it provides for you and your financial freedom, and your family, and it creates a lifestyle and a business rhythm that you enjoy. You get to take off the time that you want throughout the year, vacations, and rest.

So, having that in your mind before you start expanding or reinvesting in ways that requires leverage or debt is an important factor when wanting to have a business that you'd never have to shut down.

Number five is related to the expansion, but it's knowing kind of your trip wire or triggering point on when you need to reign the business back in.

When you need to, hopefully this doesn't happen or something that you need to deal with. But if or when you need to lay off people or have less employees or when you need to go from multiple locations down to less locations — having some sort of an understanding of when that needs to happen based on measurable numbers.

So, whether it's an income number annually or an expense number per year or even a percentage of profit, profit generating, kind of like your margin of return on your business, knowing when it's time to have to make the tough decision and essentially shrink back down if you did expand, that’s an important thing to have before it happens.

Otherwise, when it's in the heat of the moment, there's typically sometimes stuff going on in the economy and the world that is also hard to parse through and think straight in the moment.

It's important to have those metrics set up, those kinds of benchmarks before they happen, before the recession happens or a depression or another world event that throws everything in disarray.

Kind of knowing when it's going to be time to reign things in, that way, you don't end up having to shut down your business because you expanded too quickly, or you have too much of a labor cost. The name of the game is being around for the long term.

Number six is never comparing. And this relates to all sorts of avenues of life, but in business, not comparing yourself to competitors in your niche or market or the business next door or what other people are telling you they're doing.

So, that kind of goes without saying, it's important to do, but it's hard not to fall into that trap of seeing what someone else is doing or seeing how successful they're being, doing something that maybe your business isn't doing, and you think, “Oh, should I go do that as well?”

A couple reasons why not comparing is important in business is one, is it's the iceberg effect. Maybe you just see the tip of the iceberg on what looks enticing or looks prosperous from someone else, but you don't see underlying what is going on.

Maybe they're taking on a lot of debt, maybe they're super stressed, or maybe there's just a matter of time before that business down the street that looks like they're doing great things and competing with you is going to have to shut down because they took shortcuts.

Or maybe it just seems like it was an overnight success and they're doing great, but you didn't see the years of toil or the hours and hours of late nights and no rest and no vacations that they had to do to get there.

So, having some conviction and being able to focus on your path and what you're doing well is most important as opposed to seeing the shiny objects, what other people are doing, or how they're growing their business and veering off in that direction without having already developed a strategy to go that way.

And then number six is always compare. So, I just said number five is never compare. Number six … actually, sorry, number six is never compare. Number seven is always compare.

So, what do I mean by always compare? I'm saying as a business owner, in order to have it last forever and long term and never have to shut the doors on terms that aren't according to yours.

You want to always be comparing your business financials to a previous year or a previous quarter. That way you're seeing what kind of gap you're covering over time and you're also able to catch it quickly if there's a downward trend in your business profits or income or more expenses than you were aware of.

So, one thing to do specifically is to pull up your P&L report or your income statement, which shows your income over a given amount of time. So, you can pull up year to date and see how much total income you have. You can see your total expenses, and then what is net leftover? What's your profit? Hopefully, it's a positive profit.

And then you would want to compare those numbers to year-to-date last year, and see what the difference is. So, you would compare your total income last year to your total income this year at this point and see what the percentage difference is.

And especially if you have years of business, you want to be tracking the average of growth, hopefully there's year over year increase in your total income. And you also want to be tracking the average growth of your expenses because you don't want to see expenses creep up and start to eat into your profits.

But that rhythm of always comparing, and this example, your profits to each year, does two things.

One, it's encouraging to see the growth you've had. It allows you to not compare to other businesses because you're too rewarded and motivated by what you're doing. And you don't have to wonder, “Wow, are they doing something that I shouldn't be doing?”

No, you're seeing your numbers grow each year and you're realizing, “Wow, this is how far I've come, and this is where I want to be.” Because with business owners, it's easy to get overwhelmed or deflated or just to feel like it's never going to end in terms of getting to where you want to go.

Especially, because we always have big goals. We typically, have aspirations of growth and development in other places we want to go. So, being able to have a rhythm or a mechanism where you are looking to where you've come from and seeing how far you've come and how much you've done is really important.

Because we're a lot of times our own best encourager, our own best inspiration. And having that built-in rhythm of seeing where you've come. There's a book out right now called The Gap and the Gain by Dan Sullivan, and I think his name is Ben Hardy.

But they talk about this; how oftentimes we're always focused on the gap of what we need to accomplish and it's kind of depressing, versus we should be focused on the gain, how much we've done, how much we've completed, and that'll give us energy into the next endeavor.

And then number eight, have a core capital fund. So, this is a little bit more of a specific tactic relating to your business cash flow and even bank accounts that you should have in your business. And it relates to having to rely on a business line of credit.

So, one way to not have to rely on a business line of credit is to have a core capital fund, very similar to an emergency fund or a cash reserve for like a personal budget. You'd want to have something like that for your business. And a good rule of thumb goal is to have two months’ worth of business expenses.

So, look at all your business expenses throughout the year and see what the average is per month.

I'll just make up a number. Let's say it's $100,000 per month or $10,000 per month. You pick the number. If it's $10,000 per month of expenses, times two is $20,000. So, you'd want to have a separate business savings account in the business, separate from your other bank account where you're paying out payroll or taking an income and you want to title it your core capital account and have the goal of two months, $20,000.

And over time, month by month, you want to peel off some of your income coming in and put it into that account until you get to the $20,000. This then allows you to have a bit of a fail-safe or a cushion, a margin when things happen that are unexpected, an expense happens that you didn't plan for, some sort of maybe a slowdown in the market, a change happened and the way things have been flowing through your business.

You don't have to run out and scramble and start getting credit cards or loans or lines of credit. You can hopefully rely on that core capital fund to get you through to the next idea or change that you need to make to start getting your business back on course for being profitable.

And then number nine is kind of related. It's creating a personal financial margin. So, just in your business, you want to have margin and cash available. You want to have that in your personal economy as well, your own finances at home.

So, the whole point usually for a business owner having a business is so that way it flows through your business to your family. And your family gets to reap the benefits of taking the risk of being an entrepreneur.

So, one way to never have to get to the point where you have to shut down the business is by doing the right things with your income and your profit that's flowing through the business, into your personal family.

Because if you have cash reserve, personally, in your family, you have retirement accounts set up, you have your own insurance that I was talking about before, disability or term — when the business maybe is having a slowdown or a struggle, you can pause maybe your own income or your own profit draws and live off of some of your personal assets that you've built up over time.

So, it's a way to create some security by diversifying. Yes, your business is probably going to be one of your biggest assets from a net worth standpoint. But you also want to have assets outside of the business that you're building, just like any employee does at a company.

Employees should be funding a 401(k) and/or an IRA. Maybe you have real estate investments outside of the business. Maybe there's other assets that you sprinkle in there, whether it's digital assets or commodities.

Or just having a cash reserve, that allows your business to never have to get to the point where you have to shut it down because you don't have enough personally to get through to the next side of whatever that difficulty is.

And then finally, number 10, having a separate expense account in your business. So, just like you would want to have a separate core capital account for having money just set aside for the business for what ifs, and to not have to use debt, basically being your own bank.

Number 10 is having a separate expense account. So, this is basically a budgeting in your business shortcut to know where your expenses come from. So, instead of having one account for everything in your business, whether it's paying out payroll, business expenses, income, revenue, taxes — separate out expenses as a separate account, and you only use this bank account, your business expense account to pay for credit cards, it could even be payroll, you can add in there unless you want to separate payroll as well.

But for now, you just want to separate everything that goes out of the business to pay for a business expense. You're going to start using that account only.

And one way that it helps you budget and know how much money you have for another business purchase or to reinvest in your business; if the cash isn't in that account, then you can't afford it. And it allows you to see what's flowing out and kind of what the average balance is of cash that you have available to pay for expenses.

So, if you're getting all the way down to zero every month in your expense account, then you know you're pretty tight in your budget, in your business cash flow. But if at the end of every month you have thousands of dollars left in your expense account, you know you have some dry powder to be able to reinvest in your business and things that you think would allow you to be a more profitable or more effective.

And so, one way you do that is you just look at the numbers, maybe historically on seeing what expenses are. Look at your past bank statements and credit card statements in your business and try to come up with a percentage of income.

So, let's just make up a number. Let's say it's about 50% of your income, half of your gross revenue, your sales, your income is going to be used for expenses. So, maybe every two weeks, whatever money flows into your bank account in your business, half of it you just peel out and put into your business expense account.

And that expense account can be a bank account, a checking, or a savings account. And then now, you have something that allows you to know if your expenses are out of control or not in your business, and if you have room to run and do more in your business.

So, ultimately, those top 10 items there get you to a space where you don't have to feel like the business could shut down at any moment. That's a recipe and some tactics to never lose by never quitting.

So, again, my name's Eric Maldonado, thanks for listening. Owner of Aquila Wealth Advisors based in San Luis Obispo. You can reach us at aquilawealth.com, and you can click on, schedule a call and I'd be happy to do a complimentary call, and see if there's any opportunities to work together from a business planning or a financial planning or retirement planning standpoint.

Thank you for listening to today's episode of the Aquila Wealth Podcast. Want more tips on how to be financially stress-free? Sign up for our monthly newsletter, and join over 400 subscribers in receiving insights for maximizing your business and personal finances.

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Please see the show notes for important disclosures regarding Aquila Wealth Advisors, LLC, and this episode. All communication in this podcast is for information purposes only, and should not be considered tax, legal, or investment advice.

All information or ideas provided should be discussed with an advisor, accountant, or legal counsel before implementation.