At Magenta we don’t deal with actual business finances but with the financial affairs of those individuals who own or direct businesses. This week, we thought we would focus on examples of common mistakes and omissions we see made by business owners and the repercussions these can have on their financial plan and their financial wellbeing.
Personal Financial Planning for Business Owners
At Magenta we don’t deal with actual business finances but with the financial affairs of those individuals who own or direct businesses. We specialise in helping people who are so busy making their business grow that their own personal finances often get left behind.
This week, we thought we would focus on some examples of common mistakes and omissions made by business owners and the repercussions these can have. If you find these relate to you and would like to discuss this some more, then please get in touch!
Over concentration
Business executives and directors often concentrate so much on the business, that they neglect dealing with their personal financial affairs.
The ultimate effect of this is that they compromise their future security and happiness and their ability to pursue their non-work passions.
Link business and personal
Over the years we have spoken to many business owners – they often have fabulously successful businesses which provide them with an enviable lifestyle and lots of money.
Often though, they don’t take the time to assess the effectiveness of the business strategy on their personal future planning. How are the shares held? What happens to the money paid out? Can the company provide personal and family benefits? Etc.
Protect the business from a personnel disaster
Recently we spoke to a company owner who told us that the firm’s financial director and 5% shareholder, had unexpectedly died of a stroke in his early 50’s.
This put the company in a position where it had to pay out over £200,000 to his widow and family. This money was not available and a loan had to be arranged by the company.
In this case the business and personal finances are intertwined – the future of the business is at risk if key personnel are suddenly absent, but also the family of that key person need to be protected.
A situation like this is easily resolved by the firm insuring the lives of its key people so it has the funds available instantly to replace them and /or make payments to family. Similar arrangements can be made for death or serious illness.
Organise proper share agreements
Often we find that shareholders have not made proper shareholder agreements. In this case what will happen to the shares if someone dies or has to leave through illness and wants to be bought out of their shares.
This is a particular problem in family run businesses where everything runs on trust – until something goes wrong! Sibling squabbles are VERY common and divorce also carries significant risk where shares are held by a spouse for tax litigation, where they have little real interest in the business.
Make a succession plan
Other common business issues / problems occur around the subject of succession. In very small companies the owner may decide to just close the door and walk away. But where there is value in the business and / or the business is to continue, there needs to be a proper succession plan.
This leads to questions about how will the retiring owner be bought out; how much does he/she need to sell the company for; how will the remaining shareholders/directors/staff fund the buyout; what are the tax consequences and what is the timeframe before desired exit?
A succession plan will answer all these questions and if implemented well in advance, will make the transition smooth and stress free.
Motivation and priorities
When a business becomes all-consuming for the owners, we have seen family life and health suffer and relationships come to a sad end.
One of our key responsibilities when working with business owners is to challenge their motivation. Why are you working such long hours? Why are your spouse and children complaining that they never see you? What is most important to you?
A personal financial plan that takes account of all the things a client might want to do with their life, will be able to show them what they need to earn to be secure and happy.
For example if someone is working 12 hour days to earn £200,000, their lifetime cashflow forecast may show that they only need to earn £120,000 to be financially secure and still be able to pursue all their passions. Where this is the case, we may be able to restore harmony in the home and help create a better work life balance – improving health and wellbeing.
Other options include working less but for longer; working to maximum capacity for a shorter time; spending less; putting more money to work harder. All of these options should be explored with a financial planner who understands the client’s motivation and priorities.
Efficient income strategy
Over time we have seen some very poor remuneration practices. Shareholders taking all their income as dividends instead of using their tax free allowances or missing out on valuable tax relief by not taking part of their income as pension contributions.
Although the business is making the payments, the effect on the personal financial position of the recipient can be markedly improved by taking advice on the most suitable income strategy. It doesn’t have to be the same for everyone.
If you think you need to reassess your personal goals and future security in line with your business aspirations, do call for a friendly chat or drop in for coffee.
If you are not a business owner but know someone who is who could benefit from this blog, please do share it.