As a small business owner, you should consider your business to be the foundation of your financial planning. If your business succeeds, then other elements of your financial plan are more likely to also be successful. Such elements include your investment strategy, debt management, superannuation and insurances. Let’s delve into why your business is your most important asset and the impact that effective business planning can have.
As a business owner, often your business is a high priority and takes up a lot of time, effort and investment. After all, it is your business that creates the cash for investment and servicing debt.
Personal & professional financial advice from financial planners
Did you know that most financial planners are prevented from advising clients about their own business? This often stems from the licensee (the person under whose authority they provide advice) will not allow them to provide such advice. These licensee’s typically insist that the advice be limited to managed funds, direct shares and maybe some limited forms of direct property. This means that their advice is rather restricted and are looking at only half of your financial planning and wealth strategy opportunities.
Supporting your business & personal wealth creation strategies
Let’s put this into context. Consider two people – John and Fred – who each have businesses earning around $100,000 a year. Plus, they both have saved around $100,000 and are considering opportunities to invest.
John sees a ‘standard’ financial adviser who is only allowed to discuss managed investments. The adviser helps John identify an investment which makes him a 10% return each year, for which John pays his adviser $2,000. As the fee relates to an investment it is not tax deductible and given his tax rate John will need to earn $3,174 in order to have $2,000 left after tax to pay the invoice. This means that the before tax cost of the advice was $3,174.
On the other hand, Fred saw a different adviser (a.k.a. Curve Accountants). The first thing we do is discuss the business with him. We made a few suggestions, including changing payment terms such that the number of days needed to collect payment is halved, purchasing a second company car for use by Fred’s teenage daughter and using a simple system of colour-coded credit cards to automatically allocate business and private expenses, which reduces book-keeping and accounting fees.
Altogether, these suggestions increase the business profit by $10,000 a year. Every year.
Once that was done, we also looked at the $100,000 Fred has to invest and made the same recommendation that John’s adviser did. So, Fred achieved the same return of $10,000 on her investment. Add this to the guaranteed $10,000 a year of increased revenue, and Fred’s overall return becomes $20,000.
The charge for Fred was $3,000. This is more than the fee that John incurred, but because the bulk of the time spent on Fred’s case was business advice, which is tax deductible, he also only had to earn $3,174 in order to pay the fee.
Why your business is your most important asset
If you own a business then it should go without saying that the more profit you make then the more you can afford to save. Saving more means that you have the opportunity to invest more – in or out of your business. By being able to build strong personal wealth strategy, you are diversifying your investment portfolio from “just” your business and thereby bolstering your retirement planning strategy.
The bottom line
It’s important that a business owner’s financial adviser works towards the best outcome by assessing both the business and personal financial situations. The result from the above scenarios is significantly different. Whilst Fred received a more wholistic approach to his finances – one that has considerable long-term benefits, John’s advice was limited to his personal savings. Despite this, both John and Fred have the same advice cost in terms of pre-tax dollars, even though the advice fee was higher for Fred. John’s advisor specifically ignored his business, as opposed to having the advice as a focus – making the advice partly tax deductible.
If you own a business, then it should be a primary focus of your financial profile and wealth creation strategy. Good business advice is probably the most important advice of all and can have significant impact on your personal tax planning and investment strategies.