People start businesses for many reasons — freedom, unlimited earnings and many others. They frequently overlook the real responsibilities they will have, including their financial future, both their own and that of the business.

When a person gets a job, especially when on a career path, their employer generally takes over some of this responsibility for health care and retirement. And the employee doesn’t need to be too concerned about the financial needs of the business.

The cost of all of this is passed down to the employer’s customers through the pricing of its products and services. Whenever you buy a gallon of fuel, box of nails or a pair of shoes, you are contributing to numerous employees’ health and retirement funds.

Like many small business owners starting out, farriers are so wrapped up in getting their business off the ground, making sales and getting through today, this week and this year that they overlook the future. By the time they are comfortable enough with their business operation, they realize their future already has a big head start on them. So big, it may be difficult, if not impossible, to catch up.

Take A Long-Term View

A common attitude among small business people is “as long as I work hard, do my best and treat people right, it will all work out in the end.” But far too often, it ends before it works out. This illustrates short-sighted “production thinking.”

On the other hand, “management thinking” takes a long-term view. Management thinking looks at the business 1, 3, 5, 10 and even 30 years in the future. Production-thinking operators are concerned with getting through today, while management-thinking operators are concerned with how today’s operations will contribute to their success in 30 years.

Production thinkers work really hard. They are usually trying to catch up but never quite do. They try to give every customer a “good deal” and hope they can make it up on volume. If they have an equipment or health problem, it puts them even further behind. In 20 years, they are still where they started and financially not much better off than the day they started the business.

Management thinkers also work hard, but they also work smart. They try to give good value to valuable, reliable customers. They realize adverse things are going to happen and try to plan for them and know they need to have the discipline to budget for them. And they know, as small business owners, when they plan for their business, they are planning for their own lives. They determine what they want from the business and make a short-term and long-term plan to achieve that goal. They estimate their production capacity and set their prices expecting to reach the plan’s goal.

Those prices need to include a specific amount from every sale to contribute to their health care, retirement and savings. The savings portion should include taxes, business reserves and personal savings. A common mistake of small business owners is that they think health care, retirement and cash reserves are a bonus to be part of excess profits if available. Instead, large businesses and successful small ones factor health care and retirement into every sale.

Small business owners filing Schedule C — reporting profit and loss for sole proprietorships — with their Form 1040 tax return can take health care insurance and retirement contributions as an adjustment to gross income on Page 1 of the form.

Contributing To Your Future

The key to financial security is to become disciplined in contributing regularly to cash reserves, health care and retirement. This should become as much a part of operating your business as stocking your truck or maintaining your tools. You must remember that small contributions add up over time.

The three major financial issues are:

Cash reserves. This is cash kept in a savings account, ready for emergencies. This is not only to pay for that sudden transmission repair or emergency room co-pay, it’s also to cover living expenses during down time due to that hospital emergency room episode.

It has been determined that 6 months living expenses are a good figure to use for optimal security. Set aside a small amount on a regular basis, say 2% to 5% of gross sales every week.

Additionally, it is a good idea to establish a separate savings account for estimated tax payments. The Internal Revenue Service (IRS) and most states require quarterly estimated income tax payments due for the current tax year. These payments are usually based on the prior year’s tax.

In most cases, federal and state tax may represent 10% to 20% of your net income. This is a good amount to set aside until there has been at least one tax return filed while operating a small business. As the business matures and substantial business records are accumulated, this figure may be refined more accurately.

Failure to make timely estimated tax payments will result in penalties and interest in addition to the tax owed, along with possible legal consequences.

Health and life insurance. Insurance policies are a huge bother to small business owners until they are needed — then they are lifesavers. Health care insurance can be extremely expensive until you consider a broken finger can cost thousands of dollars and a broken arm tens of thousands, not counting the lost production during recovery.

Health policies with high deductible amounts are available at somewhat reasonable rates. Along with high deductible policies, self-employed people have the option of Health Savings Accounts (IRS Publication 969).

These accounts allow taxpayers to make tax-deductible contributions to an account to be used solely for the payment of medical care not paid by their private health insurance coverage. Self-employed people have the option of a tax-deductible contribution of as much as 65% of their health insurance premium each year.

The Affordable Care Act provides health insurance options for Ameri­cans with limited resources. As high risk as farriery work is, health coverage of some sort is not a luxury, but an absolute necessity.

Retirement. Many self-employed people think they will be healthy and productive until the day they pass away, so they inadequately prepare for a retirement that may last 20 to 40 years, often as long as their working lives. And then they find themselves spending their “golden years” living at a subsistence level rather than the comfortable level they had dreamed of. Here again, a bit of “management thinking” early on could have avoided significant hardship later.

Self-employed people have two basic options for tax-deductible retirement accounts.

The simple Individual Retirement Account (IRA) allows tax-deductible contributions of as much as $5,500 per year ($6,500 for taxpayers who are older than 50 years of age). (See IRS publication 590, at www.irs.gov.)

Simplified Employee Plans (SEP) allow deductible contributions of as much as 25% of the taxpayer’s income (contributions are limited to $52,000 per year with other limitations. See IRS publications 560 and 4333 at www.irs.gov.) There is no minimum contribution, but the more dollars contributed, the greater the return at retirement.

The sooner you start a plan, the longer contributions have to grow. Over a taxpayer’s lifetime, the tax savings and growth in retirement accounts can far outweigh the contributions.

Cost Of Doing Business

Financial planning is an essential part of good management. For the self-employed, good business management represents good life management.

Good managers know the short- and long-term goals of their enterprises. They use their business records to make good decisions to stay aligned with those goals. A sound financial plan is a major part of those goals.

For the self-employed, the goals of their business are the goals for their lives. Health care, retirement and savings aren’t luxuries — they are as much the cost of doing business as your supplies and truck. They should be part of the price of every horse that you shoe or trim from the first day you are in business. Remember: it’s a business.

Career Guide