The vast majority of business owners put their heart and soul into building their business, with it becoming their most important financial asset. Your business determines your wealth generation capacity and the lifestyle you fund for you and your family. Although the profitability and value of a business in the future can be forecasted, they are never guaranteed. Therefore, when developing a financial plan, it should be flexible and capable of incorporating a range of potential scenarios.
In good years, your financial plan should guide you to minimise the taxes you pay and to grow the value of your assets. In bad years, the sensible decisions you have made in the good years should help you financially navigate these tougher times.
Financial planning for business owners is different to that of employees because they have unique financial circumstances, and their financial success is usually dependent on growing the value of their company. This is evident in a number of areas.
Income
Business owners have a more variable income compared to employees who typically receive a fixed, predictable salary. A business owner’s income can fluctuate depending on the stage the business is at, the success of the business, economic conditions, and many other factors. This makes financial planning for business owners more challenging, with an ongoing need to be nimble and adaptive to changing circumstances.
Your financial plan should be capable of depicting how a potential change in the income you take from your company will impact your objectives all the way into retirement years.
Taxation
Business owners have more complex tax obligations and opportunities compared to employees. You have the benefit of having more control over how you take income and extract profits from the company, but with this comes a requirement for expert tax planning and a need for professional advice. This variability with regards to income and taking profits requires careful planning each year.
There is often a trade-off between taking more income and paying tax or reinvesting in the business and/or keeping reserves. This trade-off decision needs careful consideration each year and is impacted by a range of factors including the future forecasted success of the business and your own personal financial requirements.
Retirement planning
Business owners need to plan for their long-term financial well-being, including their retirement and in the absence of anyone else to do it for them, need to put their own pension plan in place. For an employee, retirement planning most often refers to building a pension pot that provides an income in retirement. However, for business owners, retirement often means selling the company and realising the value that has been built up over time. Nonetheless, including an element of pension planning within the overall business exit plan provides opportunities to increase the tax efficiency of your exit and extraction of wealth from the business both before and at the point of sale.
If your plan includes availing of retirement or entrepreneurial relief, pension funding can ensure that you are extracting profit out of the business into your name, while also ensuring you are keeping the overall value of the business within the scope of these reliefs.
Investing
Having an investment plan in place ensures that when you have money to invest, for example at the end of the year when making a lump sum pension contribution, you already know where and how to invest it. Pension contributions should always be invested in line with your personal investment goals and your financial plan. A strategic and planned approach should be taken with all investment decisions.
This pre-planned and aligned approach ensures that common investment mistakes are avoided. It also provides a context within which so called ‘good opportunities’ being pitched by product providers can be assessed from your perspective, to ensure that your hard-earned money is invested in line with your objectives. Unfortunately, we often see business owners without an investment plan making a series of lump sum pension investments in quite an ad-hoc fashion. The investment decisions often have no real correlation with each other or with the personal financial objectives of the business owner, have high fees and management charges, and typically lack the diversification needed to manage risk over the long-term.
In most cases, financial planning for business owners is more complex and requires more expertise than that for employees. Savvy business owners benefit from working with a specialist investment professional, financial advisor or accountant who has the capability of assisting them in aligning their company investment strategies with their own personal financial plan.
