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NOVEMBER

Personal Finance Advice For Business Owners

A client once told me that they felt running your own business was like being the smallest cog in a large machine.

Everything else is dependent on you and yet most people can’t see all the work you are doing!

I thought it was a great analogy and in the years I’ve worked with business owners, I am always pushing them to take the focus off the ‘businesses for a moment and think about themselves. It’s not an easy thing to do, but with the right help and guidance, perhaps you can start thinking of your company as an investment in your future wealth.

Put Yourself First

Lots of business owners assume their business will fund their lifestyle requirements ‘forever’, when, in all but the rarest of situations, this just isn’t possible. In reality, the long term result of owning your own business is going to be one of the following:

Hit retirement age, close the door of the office for the final time and live off whatever savings you've built up personally
Sell your business, either internally or externally
Pass on to your family - children or others - and remain de facto employed in some nominal role (chairperson, president) for as long as the company can afford to keep paying you!

The dream for most business people is that option two or three come to pass, and they are certainly possible. However CSO statistics show that in more than 4 out of 5 cases, option one is what actually happens. So of course you should try to drive the value of your business, especially in later years, however it is really important to make sure that option one remains viable at all times.

When it comes to converting company value into personal wealth, part of the problem is that too often owners concentrate on company cash-flow and make sacrifices by taking less salary and benefits, leaving yourself last in line. I fully appreciate that this is often necessary, especially in the early years, but at some point you need to be using this business to build your own personal balance sheet.

Remember, most business owners don’t just work 9 to 5. They work long days & weekends and even when away from the office it’s hard to switch off, to stop thinking about the next move, the bill that needs to be paid or that staff member that just won’t pull their weight.

I often ask clients to sit with me while I run some ‘investment analysis’ on their business, examining the money they invest (capital), time they spend working (fees), income (dividend / yield) and expected final return (performance). I’ll let you guess how well most of these ‘investments’ look to an objective eye.

So, start thinking about your business as an investment. If you’re not getting a good dividend and the likely final return on your capital and fees is not appropriate, it’s time to make changes.

Find a Good Accountant

The most common complaint from clients is that their accountant is reactive rather than proactive, always busy when they call and doesn’t really seem to care about them or their business. Inertia is a terrible thing though and too often people put up with this service because they don’t think they have any alternatives.

My advice would be to find an accountant who you feel you can pick up the phone and that inspires you, that’s not afraid to give you advice then together you can plan ideas/solutions around savings tax, improving cash-flow and ultimately help you achieve your business goals. Don’t be afraid to shop around and ask for referrals.

Protect Your Largest Asset!

Many people automatically think this is their house or their business but actually it’s your future income.

In the same way that you (should) have protection for house & business, so too future income to be protected in the event of illness, disability or death. As I’ve already addressed however, owners are always so hesitant to take on perceived costs that would be of benefit to them and are willing to sit with personal & family risk while other less important parts of the business are taken care of.

With regards finances, imagine this scenario: You’re actively seeking employment and have two offers, which would you choose?

A. Excellent salary @ €100,000.00 OR

B. A salary of € 88,000.00 with life cover benefit for your family, a full sick pay scheme until 65yrs and a retirement plan.

I think that most people would opt for the security of employment B. To know that your family is protected, that you could still have an income regardless of your health is invaluable and that your employer will invest in your retirement is statistically shown to be a huge draw for potential employees.

You can provide yourself with the same benefits and this can be paid by the company, making them significantly cheaper and tax efficient.

Death in Service Benefit is life cover for your family paid by the company. You can have a cash payment tax free of up to 4 times your salary and also provide your spouse and children with an annual income.

Income protection will give you a weekly or monthly income if you are unable to work due to any illness, injury or accident. This means your salary is covered, which will allow you to recruit staff to do your job (as best they can!).

Take as much money out of the company TAX FREE

Proprietary Directors have so much scope to invest in their future. In many cases a Director can invest almost as much in a retirement plan as they take in annual salary. It is simply the most lucrative way of getting money out of your company and on to your own balance sheet. Pensions are set up under trust which means funds are protected regardless of what happens to the business. The company can pay the premiums and qualify for tax relief and the retirement fund itself grows tax free.

Remember Option one from earlier? If that’s your likely outcome, and for 80% of us it is, then pension contributions are your only real means of taking value from your business and putting it in your own name.

Budget for your Personal Income

Budgeting your business’s cash-flow is rule number 1 for any owner. However did you know that it’s even easier to implement a cash-flow plan personally? I recommend it for all my clients and the feedback is uniformly positive. Often the fear of the unknown is what keeps us from making a personal budget – analyzing our spending habits and the likes. This is why you need someone to motivate you, push you for the data and correctly interpret it in the end.

A good financial planner, fee based so they’re not just trying to sell you something, will help you project future income and expenses to model your financial future.

Cash-flow forecasting can bring you many benefits, namely because:

It gives you a visual representation of how your financial future is progressing.
It will indicate any future cash-flow issues, for example if retirement income doesn’t look sufficient, and can then simulate how to remedy this within your budget.
It can clearly show upcoming cash surpluses and how they can be used to plan towards your financial goals.
It provides key data for “what if” modeling. You can run various “what if” scenarios, you can test different scenarios such as ‘what if I retired @ 60yrs’ or ‘what if I increase my pension now rather than later’. Testing these different scenarios will ultimately help you assess your need for action now.

Cash is king but knowledge if power. Although it’s based on assumptions and predictions, cash flow forecasting nonetheless provides valuable insight into the likely future evolution of your personal finances.

Have a rainy day fund

Sometimes, as business owners, we may have to reduce or pause our salaries due to cash-flow issues or general turnover fluctuations. To reduce the burden on your personal circumstances when this happens (and we all know what it’s like dealing with banks as a business owner) you should ideally have at least 2 to 3 months income set aside to cover day to day living costs. Work out what this figure is and then try to build it up as quickly as possible. Sacrificing pension contributions for this purpose is absolutely fine.

When investing - Don’t put your eggs in one basket!

If we have learned anything over the last 10 years it is that we need to diversify. We tend to invest in what we are familiar with and if you told people 10yrs ago that investing in property was extremely high risk they would have laughed. We all know how that turned out.

Also, business owners are often guilty of investing in areas closely aligned to their interests – namely their industry. They might purchase an interest in suppliers (or customers), acquire rival or peer businesses and even buy shares in global companies that work in the same line as them. On one level this makes sense, as we are more comfortable putting our money into things we understand. However our experience shows that this puts you at massive risk to industry or country specific risk. If you work in ICT in Dublin, don’t invest in ICT businesses in Dublin!

The key is to invest in a multi asset portfolio which means you are not investing in one asset class but a number of assets such as bonds, cash, shares & property, and that the mixture of these assets matches your attitude to risk. A good financial planner can assess this for you and design a specific portfolio where you understand the risk and reward potential for the timeframe of your investment.

Summary:

Owning your own business comes with incredible benefits. Being your own boss, answerable to no-one except your clients. Dealing with all facets of a company and living the ups and downs to a far greater degree than if you were simply an employee. That said, you need to look at it as an investment sometimes, not a lifestyle. There are too many retired business owners living on the state pension and this is something you need to prevent. Talk to an advisor or accountant today and start on the road to building something long lasting.