Mastering The Fundamentals of Capital Preservation for the Small Business Client


More often than not, a clients’ business represents their sole source of income and a generating activity of a substantial part of their wealth accumulation.

These same clients rely on the expertise of their Accountant, Bookkeeper or Tax Pro for two primary purposes:

1. To ensure compliance with local, state and federal records and tax filing requirements and obligations and,

2. For advice on decision-making involving their operating activities as well as planning techniques to mitigate their tax obligations to preserve and accumulate wealth over period of time.

Of course, these same clients also have other objectives as well, involving goals that are driven by their values as well as beliefs that are extremely important to them. However, it’s the wealth generating activities that allow the pursuit of these non-financial objectives, for without wealth, these objectives could not be realized. A simple example would be time. A business owner that works incessantly trying to grow their business lacks the resource (time) to pursue non-financial objectives such as volunteer work toward their favorite charity.

Mastering the Fundamentals – Practical Steps Toward Capital Preservation

Effective Budgeting and Managing Expenses

One of the foundational steps in preserving capital is to establish a well-structured budget and adhere to it by tracking performance against these targets. Two primary techniques for budgeting are static budgets and dynamic or rolling budgets. Static budgets are fixed and usually prepared in the 3rd or 4th quarters of the business’s operating period in preparation for the following operating period. Dynamic or rolling budgets are much more complex, and time consuming requiring adjustments during the operating period for changes in factors, such as inflation that destroys purchasing power. For small business, static budgets are often more than adequate and preferable, particularly if factors, such as inflation are considered and included in the determination of budgetary targets.

Businesses need to track their actual expenses and compare them against the static budget as a performance metric. Businesses should also identify areas where cost-cutting is possible without compromising quality or the operating activities of the business to deliver products or services on a timely basis. Consider renegotiating contracts with suppliers for better (payment) terms and explore technology solutions that can automate and optimize various processes. By minimizing unnecessary expenditures, you can free up funds that can be reinvested or saved for wealth accumulation.

Tax Planning to Mitigate Tax Obligations 

Effective tax planning is crucial for business owners looking to preserve capital. Tax planning often involves deferral of income strategies or use of the tax code to take advantage of deductions or credits (such as Research and Development credits). The key here is to remember that tax planning strategies involve reducing tax obligations over a period of time, not just reducing these obligations from year to year which is sub-optimal.

Business owners need to consult their tax professional to explore strategies to claim deductions, credits, and exemptions by considering the time horizon of certain items, like depreciation, and vehicle expenses, to name just two. Consider structuring your business in a tax-efficient manner, such as an S-corporation, for federal tax purposes and stay updated on tax law changes that apply to your business. By minimizing tax liabilities, you can retain more of your earnings for future investments.

Diversified Investments

Accumulating wealth over time requires diversifying investments and that includes striking the right balance between how much to invest into your business versus other investments such as stocks, bonds, real estate or other funds. There is no one “best” answer here. The proper level of diversification depends on the goals of the business owner, and their tolerance for risk and the time horizon to achieve these goals. But the object here if to avoid depending solely on the performance of your business. Business owners should consult a financial advisor to develop an investment portfolio that aligns with their financial goals.

Retirement Planning

Business owners often overlook retirement planning while focusing on their business. Establish retirement accounts like a 401(k) or SEP IRA to secure your financial future. These accounts offer tax advantages and can help you accumulate wealth over time. Make regular contributions to your retirement accounts and take advantage of any employer matching programs if applicable. Prioritizing retirement savings ensures you won’t need to rely solely on the sale of your business for financial security.

Reinvest in Growth Wisely

While preserving capital is essential, strategic reinvestment in your business can drive growth and increase its overall value. Identify areas where investment can yield substantial returns, such as expanding into new markets, improving operational efficiency, or launching new products or services. Implement a well-thought-out growth strategy that balances the need for capital preservation with the potential for wealth accumulation through increased business valuation.

Risk Management

Mitigating risk is vital in both capital preservation and wealth accumulation. Purchase insurance policies that protect your business and personal assets, including liability insurance and key person insurance. Additionally, establish an emergency fund to cover unexpected expenses and downturns in your business. A solid risk management strategy ensures that unforeseen events don’t deplete your capital or jeopardize your long-term wealth-building efforts.

Importance of Time – An Overlooked Capital Resource

As I mentioned previously, time is an often, overlooked capital factor when it comes to business. In the early phases of any business, “sweat equity,” is often a primary capital input into the success (or failure) of a business as cash, or property are often in short supply. Determination and sheer grit are powerful factors and often propel a business forward in spite of a lack of “hard” capital. Strategic business owners are rational maximizers that seek to use their time and resources in the most efficient and productive ways possible to meet (or exceed) their goals.

Maximize Your Working Capital 

Mathematically, working capital is defined as the difference between Current Assets and Current Liabilities (CA – CL) and represents the amount of cash and cash equivalents that a company has to work with, less cash liabilities that are due in the operating period. But, working capital is also a measure of equity based on accounting math (Assets less Liabilities = Equity).

To the extent a company can maximize its’ working capital, (by either maximizing it’s cash or assets that are forecast to be converted to cash OR minimize it’s current liabilities that chew up cash), then this benefit flows to the Net Assets or Equity of the Company on it’s Balance Sheet that are in turn shared by it’s Owners, Partners or Shareholders.

To Summarize

Preserving capital and accumulating wealth as a business owner is an ongoing process that requires a combination of prudent financial management, strategic investments, and a long-term perspective. By implementing effective budgeting, optimizing taxes, diversifying investments, planning for retirement, reinvesting wisely, and managing risks, you can navigate the challenges of entrepreneurship while securing your financial future. Remember that seeking guidance from financial professionals can help you tailor these strategies to your specific business and financial goals, ultimately setting you on the path to lasting wealth.

What’s a Client to Do?

What’s that saying? Change is inevitable? Well, when it comes to Accounting, Finance and Tax Law, change is a way of life and expertise is fleeting.

Accountants, Bookkeepers and Tax Pros are in an important and unique position to lead their clients on a path of meeting their long-term financial objectives. Although, most of these professionals continue to prefer a narrower view of their work, focusing almost exclusively on compliance-related activities – because the training Attorney’s, CPA’s, EA’s and other Pro’s have had is almost exclusively centered on compliance. Combined with the overabundance of social media and content pushing, promising “quick-fix” solutions, clients are quickly overwhelmed when deciding which professional(s) can best serve them.

People that position themselves as experts almost suggest a sort of complacency into their assertion, because no one can claim to know everything at any point in time, no matter how brilliant they may be. The landscape with regard to this profession is being “pushed” by regulatory and legal changes and simultaneously “pulled” by technological factors, most notably, Artificial Intelligence and the ubiquitous use of social media. And, what passes for “expert opinion” from so-called thought leaders in this age of social media can leave much to be desired.

As a client, your business is your livelihood. If you’re considering outsourcing your accounting or bookkeeping activities ask questions, challenge, and verify the capability and competence of your candidate contractors. Whether it’s contributed capital, sweat equity or both at risk, small business owners, partners and operators need and require a level of competent service and attention to detail that gives them an accurate picture of the health and status of their operation(s) and financial position as indicators toward meeting their long term capital preservation goals.

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