Owners need to consider several areas in financial planning for their businesses. As Chris Hewson, a chartered financial planner with Medical & Dental Financial Planners says, these are key to achieving their goals.
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As a business owner, you will put your heart and soul into building your business, often with it becoming one of your most important financial assets.
Your business can determine so much: your ability to generate wealth and the lifestyle you fund for you and your family as well as impacting your physical health and wellbeing.
Whilst the profitability and value of a business can be forecast, these numbers are never guaranteed! Therefore, when developing a roadmap for the way forward, a financial plan should be flexible and capable of incorporating a range of potential scenarios, some less likely than others to provide you with the confidence you need.
Your financial plan should be able to guide you to make the most of the good years and ensure you are prudently preparing for the inevitable tougher years. This can help to make decisions with regards to your income streams, assets, and expenses. The plan can take the emotion out of the decisions, allowing you to financially navigate these tougher times with confidence.
Financial planning for business owners is different to that of an employee because business owners have unique financial circumstances. Their financial success is usually dependent on growing the value of their company, which can often mean sacrificing their personal position in the short term. This is evident in several areas.
Income
As a business owner, you may have a more variable income compared to employees which can fluctuate depending on the stage and success of your business, economic conditions, and many other factors. This variability with regards to income and taking profits requires careful planning each year to ensure both you and the business have enough cash on hand to achieve your objectives, professionally and personally.
This can make financial planning more challenging, with the need to be nimble and adaptive to changing circumstances. However, it’s not impossible.
Your financial plan should be capable of illustrating how a potential change in the income you take from your company will impact yours and the business’s future, from your short term objectives, all the way into your retirement years.
Taxation
As a business owner, you will have more complex tax obligations and opportunities compared to those of your 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.
There can be a trade-off between taking more income and paying tax or reinvesting in the business and/or keeping reserves. This decision needs careful consideration annually and is impacted by a range of factors, including the success of the business and your own personal financial requirements.
Planning
Business owners need to plan for their long-term financial well-being and retirement. As a business owner, it’s important to look after yourself first to ensure that you can help others in the future.
This might include putting your own pension plan in place for example, rather than relying on the sale of the business to fund your retirement, which could be fraught with complexities. For an employee, retirement planning often refers to building a pension pot that will provide an income in retirement. However, for business owners, retirement often means selling the company and realising the value that has built up over time. If you plan to pass your business onto the next generation, consideration is required to what this scenario looks like for you and the next generation of owners.
A successful sale of your business, including pension planning within the overall business exit plan can provide opportunities to increase the tax efficiency of your exit and extraction of wealth from the business.
Investing
Having an investment plan in place ensures that when you have money to invest, you already know where and how to invest it. With all investment decisions, a strategic approach combined with the right advice should help you achieve your goals.
In most cases, financial planning for business owners is more complex. However, collaborating with a specialist professional like those from Medical & Dental Financial Planners helps to put in place a plan to guide you and keep you right when the complexities of life undoubtedly arise. Good luck.
