For most small business owners the health of their personal finances is closely linked to those of their business.
When business is good your personal finances will look good, conversely when trading is tough your personal finances might take a hit.
Based on discussions we have with our clients who run small businesses we’ve put together six tips for business owners to help keep both your personal and business finances healthy.
1. Get your income strategy right
The question we get asked, probably more than any other, is can money be taken from a business most tax efficiently.
Assuming you don’t plan to join Gary Barlow and Jimmy Carr with complex offshore tax planning schemes the answer usually lies in balancing salary, dividends, repayments of directors loans and pension contributions.
If you have not reviewed your income strategy for some time, or run a limited company and are not currently taking dividends, it is probably worth looking at whether you are running as tax efficiently as possible.
There is no right or wrong answer, each situation is different, however, getting your income strategy to be as tax-efficient as possible will only improve your personal finances leaving you with more disposable income.
2. Put money aside
This might sound obvious but we meet so many people who draw every penny they possibly can from their business when times are good, only to find themselves short of money when trading becomes harder.
All small businesses need to put money aside for things like corporation tax and VAT, but saving something extra each month, to use for the future is always a good idea.
If the business goes well the money could be used to help fund expansion, on the other hand, if you have short term cash flow issues then at least you have some spare capital to help tide you over.
3. Don’t accept paltry interest rates on business current accounts
Whether the money is set aside for future tax bills, a rainy day, or simply because you don’t want to draw it from the business, don’t put up with the pathetic rates of interest most business current accounts pay.
You wouldn’t keep more money in your personal current account that you need to, the same should be true of your business.
There are a range of business deposit accounts available and you should consider holding money in these rather than the business current account.
Also, remember that a business can invest. We speak to business owners who find current interest rates unattractive, but don’t want to take the money from the business because that would trigger further tax. A business can invest in many of the same ways that you can individually, with the obvious exception of an ISA (Individual Savings Account).
4. Look after the ‘what if’?
With most small businesses the owner is the key member of the team. If they can’t work for anything more than a short period of time, things grind to a halt.
Think about your own business, if you couldn’t work due to accident or illness, how long would the money continue to roll in? Probably as long as the latest invoice you sent out.
It’s never nice to consider these things but making provision for the ‘what if’ is a crucial part of your business and personal financial planning.
Getting other Business Insurance in place, such as public liability or professional indemnity cover is also important.
The ‘what ifs’ happen, hopefully not to you, but if they do you’ll be glad you did something about them.
5. Don’t overlook pensions, they can be more helpful than you think
As soon as financial advisers mention pensions to most business owners they ‘switch off’, but don’t overlook pensions or underestimate how they can help small business owners.
At a basic level a pension can be an extremely tax efficient way of drawing money from a business, which can then be used to provide an income in retirement. They also have the advantage of being ring fenced from the businesses creditors should the worst happen.
Existing pensions should be considered too, they could perhaps help to buy a business premises and in certain circumstances could lend money to a business.
Small business owners shouldn’t dismiss pensions without investigating the pros and cons.
6. Work with professional advisers you trust
The saying “no man is an island” is never truer than for small business people.
Running a business can, from time to time, be a lonely place, having a trusted team of advisers that you can call upon is important.
Getting the right IFA (Independent Financial Adviser) and Accountant will help you arrange your business and personal finances as tax efficiently as possible. Make sure these two key advisers communicate well with each other, whilst understanding and helping you work towards your goals.
Expert advice will always come at a cost, but you are good at what you do and they, likewise, know what they are doing. Try and see professional advice as an investment, and not a cost.
What tips do you have for small businesses? Have you got an experience you’d like to share?
We’d love to hear from small business owners and other professionals.
Please leave your comments below.