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  • Andrew Cremé

Five Deadly Small Business Planning Mistakes and How to Avoid Them

Updated: May 9

Financial planners often have a hard time relating to small business owners. Most planners have never had the rush of closing a single deal that made all the hard work before worthwhile, however that objectivity can also be what is so valuable about their insights. In this overview, we will examine those insights and demonstrate five mistakes that small business owners commonly make and the commonly overlooked solutions to avoid them.


Yogi Berra once said, “If you don’t know where you are going, you’ll end up someplace else.” While amusing and whimsical like most Yogi-isms, there is a lot of truth as well. While operating your business and going along as usual you may not look up to realize you are in a place unintended. The first small business planning mistake is - not understanding how deductions or depreciation works when it comes to taxes.


How do you make $100,000 in revenue, spend $100,000 on business expenses, and still owe money without going into debt? The answer may be deductions. There are certain hot topic areas which change and get business owners into battles with their accountants, and we will begin with business meals. These meals that qualify are only 50% deductible most of the time. So for a business that spends $20,000 a year on taking people out to lunches and dinners for business development, they should be prepared to have $10,000 of taxable income. So if the owner is in the 22% income tax bracket, and pay approximately 15% in self-employment tax or FICA, that’s a $3,700 check due to the IRS of “phantom income” when taxes are filed. Other areas that can have similar impacts on your bottom line through deductions are health insurance premiums, business development classified as entertainment, and depreciation on equipment or vehicles.


The good news about these mistakes is that they are fairly easy to circumvent with some knowledge. Working with a good CPA on maximizing the right deductions and minimizing the partially deductible expenses is critical. The second small business planning mistake may be easier or harder to avoid, depending on your operations, is not being diversified enough.


When diversification is mentioned, it is most commonly associated with stocks and bonds. For business owners that is still important, but there’s more to diversification when thinking through a business. When it comes to your clients, customers, or patients, how diversified are they? Does any single one make up 5% or more of your revenue? If so, this is an area to consider diversification. Another area of consideration is industry and if there is a way to diversify within that space. If you are in the retail space, are there applications that would apply in commercial? If you generate revenue through specific business development channels, are there ways to expand into new channels? Internally, have you examined your organizational chart to see how much redundancy or overlap there is between positions? If you lost an employee, who else knows what they do or how they do it?


Finally, how diversified is your capital storage for your business? Some businesses have savings that is going to be taxed that year, some have savings that has already been taxed, but why not consider savings that is yet to be taxed until a future date? By adding a pre-tax revenue and compensation deferral vehicle, it offers more diversification for your business as a whole.


The next small business planning mistake is not having the endgame in mind. Putting a plan together is an essential step of business planning, but even in a standard business plan it revolves around annual operations, financials, and marketing. Rarely do business owners think about their eventual exit and how they may want to operate the company based on that exit plan. For example, if a goal is to sell and gain the highest multiple, part of a business plan should be identifying suitors and positioning your company to be an efficient add on to their operation. Or, if the goal instead is to provide a regular source of income indefinitely without much direct management, focusing instead on employee development, delegation, and key relationship retention can be a good initiative.


The next small business planning mistake is forgetting how important you are and not protecting income streams. If you were injured falling off a ladder and couldn’t do any work for a year due to surgeries, hospitals stays, and rehabilitation – would your company survive? Many businesses have good employees that would continue to carry out their jobs to the best of their ability, but what about the highest salary paid out to the owner? That has to continue because life’s expenses haven’t just stopped, they in fact have gone up with the medical bills and life disruption. In addition, what happens when a competitor hears the news and takes the opportunity to steal the company’s largest client away? If revenue stopped from the highest few customers and all salaries had to continue to be paid the same as before the accident, how many small businesses would be in business after a year? I’d say not as many as their owner’s hope.


Instead, there are insurance policies that can help in the event of an injury. There are short term and long term disability policies and they can be good, but the one that specifically speaks to a business owner is called a business overhead policy. These policies are disability policies that pay out if a business owner qualifies after getting hurt, but they are large enough dollar amounts to be able to keep the business afloat, pay the bills, and even offer the staff a bonus if no clients are lost until the owner returns.


The final small business planning mistake is not taking a macro view as to the structure of the business. There are some pretty significant differences between operating as a sole proprietorship, an s-corp, a c-corp, or an LLC. Even more so, those differences can be exaggerated further during times of transition where an acquisition may be in the future. Some structures are not tax efficient while others are much more so and the important thing is to have an exit plan and structure the business type to minimize transition friction and taxes when possible.


Our firm has extensive experience in working with business owners to make smart decisions for their business and avoid common pitfalls. We specialize in making money make sense while helping clients keep more of their earnings. Please feel free to reach out and we will be happy to offer a complimentary consultation around your unique situation.






The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The opinions expressed here are those of and not necessarily Raymond James. Opinions are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we do not provide advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

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