Small Business Owners Still Not Saving

Small Business Owners Still Not Saving

I wrote last year about small business owners who plow most of their savings into their businesses to the exclusion of their retirement and other financial goals.  I had cited a 2006 study by the Small Business Administration that found that only about a third of such entrepreneurs had individual retirement accounts or had made contributions to them, as compared to two-thirds of working Americans.  A recent survey of financial planners with small business owner clients by CNBC and the Financial Planning Association (FPA) revealed that 70% of these entrepreneurs’ wealth is invested in their business, with only 30 percent held outside their firms.  I would have to conclude that entrepreneur attitudes towards saving have not changed much over the past eight years.

Interestingly, the biggest financial challenge identified by over 40% of respondents in this latest survey was developing a retirement plan and exit strategy.  Business issues (e.g. managing cash flow, raising working capital, and growing revenues) were of much lower concern.  That’s some good news.  It suggests that more entrepreneurs are beginning to recognize the importance of diversifying their savings for future needs rather than putting all their eggs into their one small business basket.  Of course, these were all business owners who have their own personal financial advisors, which might explain their “enlightened” attitudes!

Michael Branham, FPA chairman, summed it up succinctly.  “Small-business owners are very myopic and tend to focus on the viability and growth of their business, ignoring much else, including their long-term financial needs.”  Many don’t realize that plowing all their money into a business is fraught with risk.  The only way to fund their retirement is to sell the business and cash out.  If the need occurs during periods of business or market stress, they might be forced to liquidate at fire-sale prices, leaving them and their families with little or nothing.

As I wrote last year, the most successful small business owners I’ve known were those who determined how much they could afford to lose before making the decision to invest in their businesses.  By limiting the amount they put into the business they were able to maintain a separate safety net to support themselves and their families if/when their businesses failed.  And although most entrepreneurs believe their current business is destined for greatness, the reality is that most create and liquidate a number of different businesses throughout their working lives.

How do you figure out how much you can afford to lose?  As I wrote in another blog (Ready to Start Financial Planning?), begin with a goal-based financial plan.  It will set the stage for good financial decision-making no matter what path you choose to follow.

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