Financial planning for business owners: How to get more from your personal finances
7th January 2021
Tony Hawes See profile
Running a successful business requires many elements including vision, strategy and effective planning – something most business leaders take in their stride. Sometimes though, business owners spend so much of their time on the day to day of running their business that their personal finances can get a little unclear.
Here, I show you what the key ingredients are for a great personal financial plan – One that ensures both your business success and will help you achieve your personal financial aspirations.
Good financial planning is about being prepared
I have worked with a range of SMEs for the past five years, during which I have seen a number of owners approaching retirement without a clear idea of how much they need to support their desired personal lifestyle.
In the words of Benjamin Franklin ‘By failing to prepare, you are preparing to fail.’
This lack of attention to forward planning can have a number of negative outcomes for both the business itself in terms of its people and its performance as well as the owner and their families who may never be able to accomplish the life they really want to live when they are still young and healthy enough to do so.
The good news is, with some careful planning, good communication and collaborative expertise from your trusted advisers you can align the two aspects to achieve both business and personal success.
As the saying goes, ‘procrastination is the thief of time’ so don’t be tempted to put it off for another day – good financial planning is about being prepared, disciplined and having the clarity to know how much you actually need.
Where to start: The financial planning questions to ask yourself as a business owner
I always encourage my clients to ‘start with the end in mind’ rather than focus on the financials from the beginning. This means answering some key questions to establish ambitions and values which have often never been previously considered and are critical to the success of the plan. A helpful starting point is to consider the following points;
- What was your original motivation for starting in business and what is it that you set out to achieve in the beginning?
- How long do you see yourself running the business and at what point do you wish to reduce involvement with a view to exit?
- What does financial independence mean to you?
- As you think about your future, what would you class as being your one major overriding financial objective?
This type of discussion can be exciting, revealing and often challenging particularly where we identify differences in priorities for you and your family.
It is, however, absolutely necessary to understand what your personal goals are. Then you can begin to quantify the cost of your desired lifestyle and start building a tailored personal financial plan.
Using cash flow modelling to inform your financial plan
A series of detailed personal cash flow projections will help to demonstrate whether or not your objectives are actually achievable.
When I’m advising clients I will also look to see if the owners family and loved ones are well enough provided for in the event of premature death and advise on establishment of life cover if necessary. This is for providing valuable peace of mind should the worst occur.
These cash flow planning exercises take into account current and future expected personal cash inflows and outflows as well as existing asset values such as business equity, personal cash deposits, investments and pension savings and income.
Using cash flow modelling to create an exit plan from your business
Many business owners want to be able to assess which ‘exit’ option would be more viable for them – whether it be a full trade sale to an external party, sell to a suitable group of senior management/ employees under a Management Buy Out (MBO structure) or simply for them to maintain equity ownership but take more of a backseat in order to pursue more leisure activities and quality family time.
By understanding your personal aims along with using cash flow modelling we can identify how much your business needs to generate in order to meet your desired lifestyle. This is powerful information which can help you make an informed decision about how you want to exit from your business.
Inevitably, this work also highlights further areas for consideration where we can pin-point how we could better organise your personal finances from a cost, risk, tax efficiency and overall wealth management perspective.
Getting your business ready to make these decisions
Having identified how much you may need from your business, the obvious question now is whether your business is performing at a level to match your aims.
Positive change to business performance should always be based on accurate and timely information which means the need to apply some scrutiny over how well financial and tax administration is dealt with within a firm.
Cloud accounting tools like Xero will help improve the quality of information with access to real time numbers and the Receipt Bank app add on to help streamline the processing of invoices. These are powerful improvements over traditional accounting practices bringing greater transparency and pace not to mention helping to futureproof the business in meeting HMRC’s forthcoming digital reporting requirements under the introduction of Making Tax Digital.
But it’s not just about efficiency of process and meeting compliance requirements. Modernising your financial systems in this way can also help you to better understand your business cash flow needs and gain a better all-round insight into how your business is performing.
Old Mill advisers will take the time to understand the challenges faced by business leaders and provide a reliable ‘sounding board’ to answer questions, challenge the status quo, offer new ideas, insights and feedback bringing fresh perspectives to help fuel your ambition and support your growth plans, helping to avoid common pitfalls which could impede progress.
Get a Shareholders’ or Partnership Agreement in place
Limited companies should always ensure that they have a Shareholders’ Agreement (SHA) in place. The equivalent for a partnership is known as a Partnership Agreement.
A SHA is a private contract between shareholders of the company. The main objective of entering into such an agreement is to govern shareholders’ investment and lay down clear guidelines on the management of day-to-day affairs of the company – covering a range of areas such as;
- Directors responsibilities
- The process for dispute resolution
- How the company is to maintain accounts and who has access to records
- The transfer of shares in the event of death
- The need to insure key people in the business against death or diagnosis of serious illness
- Competition restrictions
- Confidentiality expectations
- Share structure (voting rights and dividend entitlement).
A well-crafted SHA provides a sound platform from which to trade but is so often overlooked leading to conflict and unnecessary time and cost in future years.
When looking ahead to life after business, it is helpful to consider diversifying sources of wealth rather than relying on a financial future which is solely dependent on a single event – the sale of a business – which brings with it significant risks. How easy is it to sell? Where are the buyers? What is it worth?
It’s important to put in place a remuneration structure to utilise the most tax efficient way to extract profit from the business. This would typically include company contributions to a registered pension plan on behalf of the owner(s) which enjoy attractive tax reliefs and help build wealth outside of the business to support future lifestyle plans.
At Old Mill, our purpose is making your tomorrow start today. If the issues raised in this article resonate with you then please get in touch to see if we can help.