Financial planning for business owners

Are you a shareholder, director, partner or sole trader in your own business? You must consider both your personal position and the needs of your business when it comes to financial planning, and how certain factors could affect your retirement and tax planning.

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Video transcription

*This video is for information only and must not be considered as financial advice. We always recommend that you seek financial advice before making any financial decisions*

If you are in business on your own account, as a shareholder, director, partner, or sole trader. Your financial planning may well need to include considerations of both your personal position and the aims and needs of your business. This interaction between the goals and daily needs of the personal and business can influence decisions you take around savings, investments, life assurance and your retirement planning.

It can also impact your tax planning, and overall long-term strategy. The way this occurs in reality is affected by your business status. The financial planning for a director may be different to that of a partner, which in turn, may be different to that of a sole-trader. Likewise, you may have a minority interest in a company, or be the controlling shareholder. All of these factors matter.

We can look at a few examples to highlight some of the likely areas where financial planning becomes different depending on your situation. For directors in a company, there can be many different ways you can extract money from the company to pay yourself. The various options that exist include salary, dividends and pension contributions. The balance in any tax year between these options can result in significant differences in the amount of tax you pay.

However, and this applies to anyone in business not just directors, if you pay yourself a low taxable income and put more into a pension. Which is normally a very tax efficient thing to do. You might not have enough take home pay to live your current lifestyle. Financial planning is all about working out these balances. You may want to pay yourself more, but this may stress the business situation. If you are self employed, you will need to be wary that your taxable profits are as low as you can legitimately make them to avoid unecessary income tax.

But then you might want to think about borrowing to buy a house. And you want to ensure in that case, your profits or income are as high as possible as this may help with the amount you can borrow. For many business owners, their business represents a valuable asset, a long-term investment, or even potentially a gateway to a successful and comfortable retirement. What’s the best way to extract value in the long-term from a business? And how do you do this, whilst protecting your short-term personal needs? If you are looking at selling your business, or handing it on at some stage, you may wish to formulate an exit strategy. Which could involve a goal as to when and how much. This could be relevant to your personal retirement planning, and your legacy planning.

You may wish to conduct this exercise using long-term cash forecasts. Which look closely at different options, at different stages, and how these could affect your plans. A business is often the income producer for whole families. This means individual owners or directors have to consider protecting the business, or its value, or its key people. So that their family does not become disadvantaged if something untoward happens in the business. With all of these examples, the options and variables, in the way that you can manage the affairs of your business and your personal finances, are considerable. There are many options and many variables.

The way to deal with this, is to take a financial planning view of both your business and your personal finances in one. Don’t isolate one against the other. We are uniquely placed to help you as we have the expertise and tools to work with you in all of these areas. And to support both your business and personal needs, and the long-term goals you have for both of them.

(You should consider your business and personal finances together. The overlap between the two could make big differences to how you plan your finances. Finding the right balance between the personal needs and business needs requires a skilled appraisal.)

*Nothing in this video should be construed as advice. Viewers should not take any actions, or rely on any aspect of the video when making a financial decision. Any financial decisions or actions should only be taken after appropriate regulated financial advice has been sought and received*