Given the very recent challenging economic and operating environment the focus for many self employed is on business survival rather than wealth accumulation. Hence personal financial planning has taken a back seat to the everyday challenges of running a business in a recessionary environment.
As a small business owner you know the key to success for any business is putting in place a business plan, effectively implementing it and reviewing and adapting when required. Your personal financial plan requires the same application and dedication. Small business owners spend a lot of time planning on their business but very little on their own personal plan. It imperative to identify your own personal goals and ensure they are aligned to your business goals. Otherwise it can negatively on your personal life and or business.
There are a number of steps even a hard pressed self employed business owner can take to improve their financial position today and take steps to build for the future.
- Review your existing Pensions
The collective mood on pensions still one of distrust, after years of significant contributions many pension funds are below the value of contributions paid in. Why? Clients and pension advisers focused on the tax benefits of pensions but not enough attention was paid to the actual investments o or the cost of the contract. The outcome was that clients were invested in expensive pensions that were not appropriate for them. Compounding this, the selected managed funds were not diversified and significantly overweight in Irish shares and property.
Reviewing your pension plans to determine if you can reduce costs and build a globally diversified portfolio in line with your risk profile.
- Pension contributions
The level of pension contributions by self employed individuals has dropped off substantially in recent years due to reduced incomes, the desire to maintain liquidity and misguided government pension taxation policies.
Yet important benefits remain for the self employed. Pension contributions are still deductible at your marginal tax rate; offer a tax-effective method of extracting income from your business, and moving your capital to a tax sheltered environment. In addition a pension fund provides security against creditor claims in the event of a bankruptcy event.
- Cash flow management
Successful cash flow management is the key to keeping any business afloat especially for start-ups, knowing when your liabilities are payable and how they are to be funded. A common challenge for the self employed is funding for quarterly or year end tax liabilities, an event that can place significant stress on their finances. A prudent strategy is to complete a monthly provision for the estimated tax payable in a separate cash account. This is avoids potential liquidity traps that can be fatal for a business.
- Insurance plan
In the current environment it is tempting to cancel personal or even business insurances to reduce costs. Exposing self employed individuals to risks that they or their business may not be able to recover from financially.
Before taking any decision review each policy in place to determine the risk it protecting you against and if it is still relevant. Is it possible to obtain a more cost effective policy? Reducing cover is preferable than cancellation. What is the most tax effective type of ownership of the policy? For example placing your life cover with a pension plan means the premiums are tax deductible. If you are incorporated there may be tax benefits of holding your personal insurance cover within your company.
Importantly self employed individuals are not entitled to state benefits such as disability benefit making income protection an important protection.
- Estate plan
Do you have a will? Estate planning is often an overlooked area of personal planning for small business owners. Understandably very few of us wish to consider our own mortality but a well considered estate plan can ensure that your business and personal wealth can be transferred to your beneficiaries in tax effective manner. Some key questions are what will have happen to my personal and business assets/debt in the event of my death? Will death taxes be payable? How can they be minimised? How will my dependents be provided for? If in a partnership or joint ownership what happens to my partner’s shareholding in the event of their death?
- Retirement strategies
As part of any business plan it is necessary to have an exit plan in place well in advance of the sale. Ideally you will have created a saleable process driven business that does not rely on you for its success to obtain the maximum value for your business. Understanding the tax concessions available and putting in place the right ownership structures means you can maximise the after tax proceeds from the sale of your business.
- Business structure
Review the available business structures to determine the most appropriate one for your needs and that of the business. The current high level of personal taxations has increased the attractiveness of using the company structure. While it is more expensive than a sole trader structure, it does allow for additional planning strategies including limited liability, capital sheltering and debt repayment strategies. Importantly if your business is not generating surplus income it is unlikely that a company structure will be of benefit.
Completing an annual check up of your financial plan based on the above principles will lay the foundation of a successful financial plan. Alternatively you may use a professional financial adviser to management your financial plan so you can focus your time on making your business a success.
Trinity Financial Management can help you optimise your financial affairs, so can save time, save money and achieve what is important to you. Contact Frank on frank@trinityfinancial.ie to find out more.
This article is provided on the strict understanding that it is for the reader’s general consideration only. Accordingly, no action must be taken or refrained from based on its contests alone.
