Why Financial Planning for Nonprofits and Business Owners is Different
by CLIFF TAYLOR, PARTNER
According to the National Center on Charitable Statistics, approximately 30 percent of nonprofits fail to exist after 10 years. According to the U.S. Bureau of Labor Statistics, 70 percent of small businesses fail in the first 10 years. Why? Often times, it’s the lack of a strategic, financial plan.
At TrustCore, financial planning for business owners and financial planning for nonprofits are two of our specialties, and unfortunately, we’ve seen what these statistics look like in real life. Owning a business or running a foundation can be a dream come true, but it also brings a more complicated financial life – you’re not just thinking about yourself and your family anymore but the livelihood of your employees and volunteers, not to mention the business or foundation itself.
In an attempt to cut costs, we often see business owners and nonprofit boards take on important roles themselves; roles that they may not actually be qualified for. Many times, that includes the role of financial advisor. However, if financial planning is not your area of expertise, this “cost-saving” attempt can ironically cost more in the long-run – financial mistakes can be expensive!
Think about it: If the roof of your house was leaking and you weren’t a professional roofer, would you try to repair it yourself? We’ve all seen how this can end: A non-skilled DIYer ends up spending more money trying to fix the roof themselves, and then ultimately enlists the help of a professional to either finish the project or fix mistakes that were made by trying to save money in the first place.
To ensure you are meeting your goals, optimizing your resources and maximizing strategies to financially further your organization’s objectives, such as investing wisely and planning for taxes, it takes the right knowledge.
Another misconception we see as financial advisors in Brentwood, TN is that financial planning for business owners and financial planning for nonprofits is the same as that for individual investors. It’s not! There are unique tax concerns, reporting requirements and many other people to consider when making decisions about the future.
To help get ahead of this negative trend, the team at TrustCore highlights a few areas where DIYers tend to go wrong.
For more guidance, check out our new guides:
Financial Planning for Business Owners
Financial Planning for Nonprofits
Schedule a no-obligation conversation with the TrustCore team to see how we can help.
Nonprofits may have an endowment. The endowment is an asset that must be managed actively and well to stay the same or to grow. A shrinking endowment is a danger and a potential source of instability. Nonprofits may also experience instability due to shortfalls in the receipt of grants or donations. The nonprofit may need to seek other grant sources or more robust fundraising.
Business owners may experience instability on many fronts, but the reasons may be different. Shortfalls in sales projections, for example, may arise because of issues with sales, the product itself or consumer spending. The solution may be changes in those areas.
Many states require incorporated nonprofits to have a board of directors. Business owners, on the other hand, often don’t. While a board of directors can provide stability, advice and long-range planning capabilities, they can also complicate financial planning and generate additional levels of required communication and approval needs.
Changes in markets can affect the endowments of nonprofits. For business owners, changes in markets can have impacts that are both professional and personal. A decline in markets can impact a business’s assets and ability to do business, and may affect their ability to grow or retain employees. If a business owner wants to expand or sell a business, market changes exert marked impacts on whether conditions are favorable or unfavorable.
Read our recent blog post: 5 Misconceptions Business Owners Have About Retirement.
Just as your financial needs can change in your personal life, the needs of a nonprofit and business can also change. If you’re handling your financial planning on your own, can you adapt to those changes?
A financial advisor specialized in helping nonprofits can help monitor and offer support when this happens. Is the population or demand growing or shrinking? Are you or another key player in the organization ready to retire? Has the economy changed your company or foundation’s mission? If so, what does this mean financially?
You Have More Options
As a business owner or nonprofit, there are additional retirement accounts to consider, tax policies to review and exit strategies that are available to you.
If you own a business, for example, do you plan to sell your business, pass it down to the next generation or sell only parts of it? A financial advisor who specializes in working with clients like you can help you navigate these important decisions.
Taxes are Complicated
As a financial advisor in Brentwood, TN, there’s no question: Taxes for both business owners and nonprofits are far more complicated than they are for individuals. Nonprofits, for example, are not liable for certain taxes. However, if they do receive income from certain types of products, the profit may be taxable.
Business owners need to understand what federal, state and local taxes they are responsible for, and when they need to be paid. They may be responsible for taxes on profits, for example, but also for certain withholding for employees, such as Social Security and Medicare taxes, and property taxes if they own property. There are also potential tax breaks they may overlook on their own.
Reporting needs go beyond financial records. Nonprofits, for example, need to submit the correct paperwork to maintain their tax-exempt status, and if they receive grants, they must properly report the use of the grant money to the grantor.
For a business owner, proper reporting of profits and losses is crucial, and past profit and loss statements and projections are key to most exit strategies.
The Bottom Line
Whether you are a business owner or oversee a nonprofit, your financial planning strategies are more complicated than those of your average individual. The more complicated your life is, the more areas there are for opportunities, but more importantly, to make a mistake.
Schedule a no-obligation conversation with the financial advisors at TrustCore to see how we can help. A simple discussion can have a big impact.
Important Information and Disclosures
Readers are encouraged to conduct their own independent research. This information is intended to be limited in scope and provide basic educational information on presented topics. Data represented is believed to be from reliable sources.
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