It is important that all the personal financial affairs of a business owner are in order, just as important as this is for the business.
For most business owners and entrepreneurs starting out, there is no separation between one’s personal life and the business. This means that until the business has grown, the financial planning requirements of an entrepreneur are unique and must take into account all the opportunities and circumstances that may arise.
Business Investment Risk
In many instances, an entrepreneur invests all their disposable assets to starting a business. The main problem is that there is a high business failure rate and unique challenges affect a new business.
It is therefore prudent for an entrepreneur to try and spread some of the risk by not putting every asset owned into the business. Although this temptation is great, especially as every business owner does not expect to fail, entrepreneurs must avoid literally putting all their eggs in one basket.
How to spread the Risk
Investment Plan: Most business owners start off with a detailed business plan for their business but do not take into consideration that they need a detailed personal investment plan. A personal investment plan is similar to a personal cash flow statement but tracks your personal finances in the future taking into account money that will be available to get through the rough times.
In this personal investment plan, it is important to avoid using “expected future income” from the business, by ignoring this income, one can be certain to survive. Another reason to avoid income from the business, means you do not put pressure on the business to fund a lifestyle.
Cash Cushion: A business owner must strive to have a six month cash cushion, this is an amount of cash sufficient to fund a lifestyle. This amount becomes even more important when the business owner has a family or dependents. As an entrepreneur, it is important to have their support and this cash assures them that you are in control. Without the support of loved ones, a business has a higher risk of failure.
Dealing with Debt
Most start-up businesses depend on some debt when an entrepreneur does not have enough equity to fund operations.
When starting a business, the amount of debt needed is calculated in your business plan. Since a business plan is so important, it is essential for the entrepreneur to invest in getting a professional to assist at this stage.
The amount of effort and detail in a business plan often can influence success or failure. The business plan must also take into account the financial needs of the owner when the business enters into a profit. It is important that many start-ups may take several months before reaching break-even point.
Tax & Estate Planning
For small business owners, tax planning is very important as the finances of the business and the finances are intricately tied together. Therefore, it is important to employ the services of a CFP Professional in the tax affairs of an entrepreneur.
Just there is an array of tax liabilities as a business owners, there are also many deductions, rebates and allowances that may accrue to a business owner with a professional tax planner. Tax planning is a means of ensuring savings and benefits for your business and personal life and when left to a professional counsellor, should not dominate the life of an entrepreneur.
Estate Planning is a type of tax planning to reduce tax liability at death. Without estate planning, it is unlikely that a business owner can pass the business on to a spouse or the next generation. Often, estate planning for business owners is included when considering business assurance.
Business Assurance and Insurance
We have previously discussed business assurance at length. This involves risks around succession planning, death or illness of a key individual in the business and other losses of the income to the entrepreneur and the business. Hand in with the business assurance is the need to have adequate insurance cover for the business building and assets.
Equally important, home and car insurance of the business owner is just as important. A major personal loss due to theft, fire or accidental damage can affect a business negatively.
Consult a Professional
To understand, and for expert advice on business assurance, please consult your financial planner. If you do not have a competent financial planner already, you should consider interviewing prospective financial planners and conducting background checks with their references. You will also need to confirm their accreditation with the relevant professional body.
Author: Gerald Mwandiambira is the acting CEO for the South African Savings Institute. He is a CFP Professional postgraduate, Financial Planning Law graduate and an Economics graduate. He has experience in banking, stockbroking, insurance and investments. He also has experience as a financial analyst and strategic planner.