My top 10 financial planning tips for business owners

If you own your own business, it is perfectly understandable if financial planning often takes second place to the day-to-day running of your company.

Many of my clients are in this very position, focused on the success of their company and, therefore, often overlooking or neglecting their other finances.

Here, then, are my top ten financial planning tips for business owners. Whether you’re running a well-established business, or just starting up, you should find something here for you.

1. Keep your business and personal finances separate

Clearly the success of your business is central to your wealth and being able to enjoy your life. It’s also crucial to your future, acting as the engine to your financial situation.

However, it’s important to focus on the finances of yourself and your family. Make sure you pay yourself a salary that is enough to meet all your family’s financial requirements. While this would seem to be obvious, I’m seeing many business owners take large pay cuts in the pandemic – cuts that they were unable to sustain.

Keeping your fingers crossed is not a good strategy, so ensure you are setting enough aside each month to safeguard your future.

2. Always know where you are financially

When dealing with your finances, both work and home, it’s much easier to make informed financial decisions if you keep your financial records up to date.

So, ensure you keep on top of your paperwork and record-keeping. Trying to do it all yourself can often be a false economy, so get help if you need it.

You will also find that an experienced financial professional can often add real value to your business.

3. Use cashflow forecasting to help plan your future

You’ll recall that in my blog posts for March and April I looked at cashflow forecasting.

As well as mapping out your financial future based on your current circumstances, we can also use it to run regular “what if?” scenarios.  These give you the opportunity to see how robust your finances are and can help you avoid potential mistakes that could prove costly.

I always recommend carrying out this kind of “war-gaming” on at least an annual basis, and certainly after big events that can impact your business and personal finances, such as a market crash.

4. Maximise your pension contributions

“My business is my pension” is a common expression used by many business owners. But if, through no fault of your own, your business starts going badly, it could impact on both your lifestyle and your retirement.

Generous tax incentives make putting money into a pension one of the best ways to save and invest.

As a business owner, you can use the business itself to make much larger contributions that you could as an individual. Such contributions are tax-deductible and will lower your Corporation Tax rate if you’re incorporated.

By building up a healthy pension fund, you are giving yourself the ability to have greater control over when you want to stop working. You could also increase your quality of life once you retire.

5. Consider using your business property for pension purposes

As well as making personal contributions, you might also consider using your pension to buy your business premises so that they become an asset of your pension scheme. You can do this either through a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS).

By owning your premises through a pension arrangement, any rental payments you made would go straight into the pension scheme and therefore increase the scheme’s value. There are also additional business and tax advantages.

However, setting up either a SIPP or a SASS is not a straightforward process. Careful planning is required, and I would always recommend working with a financial planner if you want to do this.

6. Look to invest in more than just a pension

How you invest is important. Making the right investment decisions can make a big difference to the total size of all the assets you build up.

As well as saving money into a pension, you should also consider other investment options that can help you build your overall wealth.

Individual Savings Accounts (ISAs) are a very tax-efficient way to save. In the 2021/22 tax year, both you and your spouse or partner can pay up to £20,000 into ISAs.

Once you’ve set aside an emergency business fund, you should also consider investing any surplus capital in your business, rather than simply leaving it in a low-interest savings account.

7. Ensure you manage any debt effectively

The ability to borrow money can be vital for any business. It means you’re able to invest for growth, as well as provide short-term relief if the financial waters get choppy.

However, having to borrow money at high levels of interest can sometimes exacerbate problems, rather than solve them, and can make some borrowing prohibitively expensive.

To avoid high borrowing costs, always make sure your credit rating remains healthy. If it currently isn’t, consider prioritising the necessary steps to improve it.

8. Make sure your business and family are both protected

Although we cannot usually prevent illness or death, it is possible to reduce their impact on both your family and business finances.

Income protection can provide a monthly payout if you’re unable to work because of illness or injury, ensuring you’re still able to meet your daily living expenses.

Alternatively, you could consider critical illness cover, which pays out a lump sum if you’re diagnosed with a specified critical illness.

Life insurance pays a lump sum to your dependants if you die during the policy term. It can give you peace of mind that your family won’t suffer financial hardship if the worst happens.

To protect your business in the event of your death, consider setting up a key person insurance policy on your life. Also consider a similar policy on any important people you have working for you whose death would severely impact on the financial success of your business.

9. Make sure you have an up-to-date will in place

As well as the right protection, the other straightforward way to look after your family in the event of your death is to make a will.

This lets you specify how your personal and business assets will be distributed when you die and who will disburse them.

Once you have a will set up it’s worth regularly reviewing it, especially in the event of impactful events such as divorce or the birth of a child.

10. Think about the future and plan ahead

As well taking steps to review and manage your finances now, it’s also worth getting into the habit of doing this regularly – at least once a year.

Key decisions such as when you’ll want to sell your business and when you retire are much easier to make if you’re thinking about them some time before they happen.

It means you can adjust your financial plans if you have to and can ensure that you stay on track and fulfil your wishes.

Get in touch

As you’ve probably realised while reading this article, financial planning is never straightforward. It’s even less so if you’re a busy and successful business owner, focused almost entirely on building and nurturing your business.

As an experienced financial planner, my role is to support you with all the different steps I’ve outlined here. If you think I can help you, please get in touch. Complete the contact form or call me on 020 3813 8265.

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