Running a business is difficult. Very difficult. It can be all consuming in fact, and if you are a business owner the demands on your time can naturally mean that you end up neglecting your personal affairs.
Effectively managing your financial position need not be excessively time consuming, but it is important to spend some time budgeting and planning to ensure that everything is in order. I understand that time is your most precious commodity, but I promise that devoting a similar level of diligence to your personal affairs, as you do your business’ finances, will prove a good investment.
In order to make sure that you are getting the most bang for your buck, this week I thought it would be helpful to summarise some of the practical guidance that I have given to clients, who are also business owners, over the years.
Start With The End In Mind
Every business needs a North Star to strive towards. When it comes to your personal finances, the situation is no different.
Being clear on the lifestyle that you want today, and into the future, along with how much this might cost (being careful to take account of inflation) will make it easier to establish targets for how much you want to draw from the business, and an eventual valuation for the company. A pound specific financial plan can provide invaluable context on this front.
Planning for the future isn’t just about the numbers though. Taking the time to think about how you want your life to look post sale, when you have the time to do what you have always wanted to do, can ensure that you move forwards with purpose.
Prepare For The Worst
As a small business owner you are likely to represent the main driving force within the business. As such, a large portion of the value of your company may be lost in the event that you are no longer able to work.
Key Person Insurance pays out if you, or another important individual within your company, falls ill or dies. In a similar vein, Shareholder Protection will pay out in the event that a shareholder in your company dies or becomes critically ill – providing funds for the remaining shareholders to buy out the deceased’s holding. These funds can then be used to support the deceased’s family, while ensuring continuity and certainty for those remaining within the business.
Prioritise Pensions
“My business is my pension” – no, your pension is your pension.
If cashflow permits, making contributions directly from your business can be an incredibly tax efficient step to take. Not only do you save any income tax that you would otherwise have paid on extracting funds from your business, but pension contributions can also be offset against a company’s corporation tax liability for the year. Any returns generated within a pension are done so free of income or capital gains tax, and under current rules you can take up to 25% of your pension tax free when you come to draw down from your pot.
A pension may also be used to purchase your business premises, providing a tax efficient means of holding this asset or providing liquidity for your company to reinvest for growth.
Maximise Returns
Successful businesses accumulate cash. Now that interest rates have returned to sensible levels, business owners should look to maximise the yield that they get on that cash through the use of corporate savings accounts, and if appropriate, a corporate investment.
Corporate investments or savings deposits may be held within a bond to defer any corporation tax liability, but this would only be deferred and there is cost involved in establishing a structure of this nature. One for an adviser.
Embrace Diversification
It is likely that your business makes up a large proportion of your overall wealth, as well as your personal future earnings stream.
Sectors within the economy invariably go through difficult periods, and individual businesses within those sectors suffer through no real fault of their own. It is important at times like this that your own personal investments are properly diversified in order to ensure that you are able to ride out such slowdowns.
Diversification and your cash savings act as your “financial bulletproof vest”. It is important to ensure that it is always robust enough.
Exit Planning
Regardless of how you are planning to exit your business, it is important to prepare well ahead of this. Getting a business ready for sale is a bit like getting your house ready to put on the market, you need to make sure that it’s looking its best.
Ensure that a strong management team and corporate structure are in place. Settle outstanding invoices with creditors and suppliers. Cut down on your personal expenses. And prepare your end of year accounts - in an ideal world you should aim to sell at or just after your year end.
If you are in any doubt on how best to structure your sale – consult tax, legal or accounting professionals. This is a big decision, and one that it is important to get right.
Post Exit Planning
In the immediate aftermath of a business sale, there is a lot to consider – good decisions are ones made slowly, take your time.
If you have received a large capital sum for your business, you may wish to consider holding this with National Savings & Investments (NS&I). Rather than be subject to the maximum £85,000 cover per person, per institution that the Financial Services Compensation Scheme offers - savings held with the NS&I are fully backed by HM Treasury.
Be Aware of Your Tax Position
When you sell your business, any profit that you make which exceeds your annual tax-free allowance (£3,000 for Tax Year 24/25) will be subject to Capital Gains Tax at 10% or 20% depending on whether you are a Basic or Higher Rate Taxpayer.
The tax on these profits might be subject to certain reliefs – most notably Business Asset Disposal Relief, which reduces tax on any gain up to £1m on a trading business sale to 10%.
You can also defer paying Capital Gains Tax on any profit by re-investing funds into certain other kinds of investment. However again it is important to note that this only defers the payment of tax, rather than eradicating the need to pay it at all.
Given that in most cases your day to day focus will be on the business, it is important to try to automate as many of these sensible financial actions as possible. Set up regular pension contributions, sweep up excess cash in the business into a savings account monthly etc.
If you can get to a place where your personal finances are running themselves (or someone is running them for you) - then you can focus your time on what is going to have the biggest impact. Driving your business forward.
Comments