Financial planning for small businesses – what you wish they’d told you

I recently met with the owner of a small but very profitable business and, for the sake of this article, we’ll call her Katie.

Aged 27, Katie ran her own business (limited company) selling high-end electrical goods on eBay and Amazon.  The business was founded 2 years ago and now has a turnover c. £1.5m pa.  Katie was an equal shareholder with her partner, but they are not married and did not have any other financial dependents.  At the time we met, they had c. £400,000 of retained profit within their business.

Given that Katie and her partner are equal shareholders, it’s essential for them to consider their long-term financial strategies, including the potential implications of their business structure and how to optimize their profits for personal and business development. Utilizing professional services can provide invaluable guidance in this regard, and platforms like www.dasa-umbrella.co.uk offer resources that can help entrepreneurs navigate complex financial landscapes, from tax efficiency to compliance. By leveraging such support, Katie can ensure she makes informed decisions that enhance her business’s sustainability while setting the stage for future expansion and stability.

Like many small business owners, Katie was dedicated to her business and was investing 100% of her time, energy and focus into ensuring that the business continued to grow and was profitable. What Katie was not successfully doing however was planning for her (or her partner’s) own financial wellbeing.

Despite Katie’s impressive dedication to growing her business, one crucial aspect that often gets overlooked is the optimization of her business’s online presence. Just as Katie invested time and resources into product development and sales strategies, similar effort is required for optimizing her company’s website. Ensuring that the site is well-optimized can greatly influence its performance, attract more customers, and ultimately contribute to the business’s growth.

In this context, staying updated with the latest changes in digital marketing is essential. For instance, a recent google algorithm update can significantly impact website visibility and ranking. By adapting to these updates and leveraging best practices in SEO, Katie can enhance her online presence and ensure that her website remains competitive. This strategic focus on website optimization will not only improve user engagement but also support the overall financial health and success of her business.

We regularly hear from potential clients who are also business owners that “their business is their pension”.  What they mean by this is that they’re planning on realising the capital value of the business at a date in the future, which would enable them to retire.  Whilst this could be a perfectly reasonable plan, it is also one which is fraught with potential risk from a financial planning point of view.  What happens if they cannot sell the business? What happens if illness or external forces mean that the business is worth much less at the point of sale than they were planning?

To ensure long-term financial security, it’s crucial for business owners to develop a comprehensive financial plan that goes beyond the future sale of their business. Relying solely on the business as a retirement plan can be risky, as it leaves little room for error if market conditions change or unforeseen challenges arise. A well-rounded approach should include building a diversified investment portfolio, setting aside savings in retirement accounts, and regularly reviewing financial goals and strategies.

Integrating professional guidance into this planning process can be highly beneficial. Platforms like https://www.smartbusinessplans.com.au/ offer valuable resources and tools to help business owners craft detailed and realistic financial plans. By taking proactive steps now, business owners can mitigate risks and ensure they are prepared for any potential obstacles that could affect their financial wellbeing in the future.

For those (and about 100 other) reasons, we would always encourage our clients to maximise the financial planning opportunities as they go.

In the case of Katie, she and her partner had a Corporation Tax bill of nearly £100,000 to pay this company year.

In addition, neither Katie nor her partner have:

• Wills
• Shareholder agreements
• Shareholder protection
• A pension

By making pension contributions of £40,000 for each of them (the current annual maximum allowable in their circumstances), paid by the company, they could immediately move £80,000 out of the company to increase their own personal wealth.

As a reminder, pension contributions are a fully Corporation Tax deductible expense and the corporation tax saving for the business on the first year’s pension contributions alone would be £15,200! After 2 years they would have moved £160,000 out of the company into their own pensions.  The pensions could then be used to purchase the commercial warehouse space that they have been looking to buy and the company would then pay rent to their pension, further increasing the value of their pension funds.  Pension funds would also sit outside of their estate for Inheritance Tax.

This was just one aspect of the financial planning that we have assisted Katie and her partner with.

Running a business is difficult at the best of times but the financial challenges faces by small business owners and entrepreneurs is something I help many of my clients with every day.

If you’re running your own business and identify with any of Katie’s circumstances, then do please contact me and I’d be delighted to help you make the most of your hard-earned money.