Why financial planning is different for business owners

As I am discovering myself (running my own business for just a few months now), it is completely different being a business owner than an employee. For a start, your business is on your mind 24/7; what needs to be done, what are the cashflows like, when will that invoice be paid, what marketing strategies need to be implement. The list goes on.

As a financial planner, I see key differences in a business owners finances to those of employees.

  • Especially in the early years, business owners only take out what they need to survive on. Paying tax is an additional cost to my business (when I say business, I mean me) so why do it unless absolutely necessary?
  • Business owners take on a lot more debt. It’s needed to start up the company, expand the company, buy a premises, overdraft facility. Then there’s the personal debt and personal guarantees.
  • While they take on more debt, business owners also focus on paying it off quicker. Debt is not something you want to have to service when times get tough, so business owners tend to focus on getting rid of it as soon as they can.
  • While minimising their income, business owners maximise what they can get their company to pay for (I’m not talking about funding your lifestyle). Things like pension, life cover, income protection, mobile phone, having civil service mileage rates (up to 59.07c per km for 6,347km) can all be paid for by the company in a tax efficient manner.
  • There isn’t a pre determined retirement age. Owners are passionate about their business and they should be, they’ve built it up from scratch. It’s part of them. They don’t want to just stop because they have reached a certain age. What they do want though is choice. The choice to carry on working because they want to and not because they have to.
  • Then there is the fact that there is a business asset there that can be used to provide an regular income stream in retirement or sold to provide a lump sum. If certain criteria are met, you can receive up to €750,000 tax-free from the sale of your business. It is therefore vital that the value of the business is built up over time.
  • Build a business that someone can buy off you. If your business is you, your contacts and your expertise, it will be difficult for a potential buyer to find value.
  • If it is a family business, will an outsider want to come in and be a minority shareholder with no authority? The whole family should have an exit strategy or succession plan.
  • Don’t rely on it as your only retirement asset. You want financial independence, not reliance on one event that can be affected by outside events. There are so many things that prevent you from being able to sell it; can’t find a buyer, buyer can’t get funding, competition introduced (remember when taxi plates were worth £200,000?), business becomes obsolete.
  • Are you maximising profits? What kind of mark up do you have on your products compared to your competitors? Ask your customers if they will still buy from you if you increase prices by an additional 1% or 2%. Not only will you be increasing the value of your business, you will also be increasing the cash available for you to enjoy your  lifestyle.