Avoiding Risk as a Young Business Owner

I’m Colin Richards, president and founder of Lord and Richards, and I’m excited to talk to you again about financial independence: the foundation of all our programs. In this mini-series for young business owners, I’ve been discussing what I wish I had known when I was thirty. While small businesses have been popping up at an accelerated rate since the pandemic, unfortunately, many of them fail. I want to help young business owners establish a strong business for God's glory that will be financially sound and provide for their families.

?

In previous episodes, I've encouraged you to utilize a key principle from Mike Michalowicz in Profit First by setting aside money each month from your operating account for your income, taxes, etc. In this episode, I will dial in on Lord and Richards' principles of financial independence regarding risk and danger that apply to you as a business owner.

?

The number one risk you want to avoid is bankruptcy, and we will continue talking about finances to ensure you understand the language of business: financials and accounting. Always record and report financial transactions in good software like QuickBooks. If your business is thriving, you can take a step towards employing an accountant or bookkeeper. While many firms keep their financials within their business, I outsource mine to a group of accountants who have access to my accounts and report to me monthly.

?

Monitoring cash is crucial when trying to avoid bankruptcy. Reporting comes in many forms, especially if you're involved in modalities beyond cash accounting, such as accrual. While service business may suffice with cash accounting, accrual accounting may be necessary if there's a significant lag between a sale transaction and receiving the funds or if you’re involved in inventory. Regardless, reports have specific bits of information relevant to you. If you haven’t already, take the time to learn the language of accounting. As a shortcut, watch your cash flow and don't allow financials to distract you from noticing if your balance is decreasing each month. When the cash runs out, the game is over, and bankruptcy is ahead!

?

Another strong piece of advice for you is to insure yourself against certain types of losses; transfer the risk to someone else. For example, if you were to become disabled and could no longer be at the helm of your business, would your family be able to survive? Disability insurance is affordable and could provide an income should you become permanently disabled. You would be covered during a severe health crisis, including those non-work related, and insured against the risk of no longer generating income. We ensure all our employees at Lord and Richards have disability insurance. Full disability will give you up to $6,000 per month, but if you make an income beyond that, research individual insurance policies that will add more money to ensure a sufficient income. Don't assume danger isn’t ahead. Plan for the worst and hope for the best. Find an inexpensive disability policy, especially if others are relying on you.

?

Let’s talk about health crises. I can't tell you how often I meet with business owners who go without basic health care to save money. This strategy is a massive gamble, as there are many things we don’t understand about our bodies and illnesses we may not feel. You may also be a young business owner with a spouse, risking the possibility of maternity, which is quite expensive. Whatever the scenario is, you don't want to be left holding the bag, unable to afford the treatment needed to take proper care of yourself in an emergency or healthcare crisis. Even if your coverage is the lowest cost or for cataclysmic events, include it in your budget with food, clothing, and housing.

?

While we hope this never happens, we must consider the possibility of early death. Do you have basic life insurance to aid your family should you pass? I’m referring to term life insurance, the simplest form. Permanent life insurance is still valuable for certain situations, but I will discuss that in future episodes. Term insurance is appropriate coverage for your working years when your family relies on your income. We don't want to gamble with this possibility; term insurance is inexpensive and easy.

?

How much is enough? Assume your wife and children will need to live on this amount for the rest of their lives. If you have children and your wife needs to provide for them, consider their ages. If they're young, you’ll need more; if they're older, focus on your wife. Term insurance is designed to meet your family's needs when you're gone.

?

Whether it's a twenty or thirty-year policy, multiply your expenses by twenty and leave out taxes, as life insurance isn’t taxable. This is a bit more than what is typically recommended. However, bear in mind, that your family's expenses will increase. Some people even ladder in additional policies to slowly raise the standard of living for their spouse. This should offer coverage until other things settle in, such as savings and Social Security.

?

Lastly, a major risk many business owners don't address is what happens to the business once they die. Is there a plan to sell the business? Is there a delegated person who will buy it and take over? You must work out these details in advance. In a subsequent episode, we will discuss succession planning in your business.

?

At Lord and Richards, we work with business owners of all ages. I would be delighted to help you, drawing from personal experience and what I’ve observed from my clients. It begins with a simple phone call.