Businesses & Financial Planning
Why business owners should use financial planning methods in their businesses
Financial Planning is an established method for individuals to organise their finances.
It is based on an internationally recognised six step process which establishes a direct connection between the individual’s current position and their ultimate financial and lifestyle goals. It defines the relationship between the individual and their Financial Planner.
Conventionally the process is used for personal financial planning. We wish to examine, in this article, whether the process could be adapted by businesses and those owning and running businesses.
Is it possible that a business could flourish by applying the Financial Planning principles?
It is worth recognising, as a starting point, the rapid development of owner/managed businesses in the UK over the past few years; something in excess of one million new businesses have been formed in recent times – many by individuals who have become self-employed, often individuals aged 50 and older. There are now around five million businesses in the UK.
This surge implies a shift towards more and more people becoming self-reliant – or reliant on their own businesses.
The ‘success’ or ‘failure’ of the business will directly affect the owner’s income position, possibly their retirement position and will have a direct impact on their wider family. For example, just ask anyone who has had a business failure how this can knock on to other areas of their lives and the lives of their spouses and children.
Can an application of the Financial Planning principles into a business strengthen the business and increase the chances of success? Should people who own and run businesses seek out and work with a Financial Planner?
To answer these questions let us examine why Financial Planning works for individuals.
At a simple level it works because it directly connects the position an individual is in today with their long term goals. These goals are both financial and lifestyle. A plan is constructed which steps out how the individual gets from now to their future targeted position, instigating a series of targets which are regularly reviewed.
The plan will factor in all sorts of possible scenarios and will ensure the individual protects their family position and will maximise their tax efficiency.
Financial Planning is especially important to quantify and map out how and when an individual will retire – looking to provide a clear pathway both up to the retirement point and then beyond.
Financial Planning structures the journey for the individual throughout their life stages; working round a defined plan which is constantly monitored.
There is a plan, it is agreed between the individual and their financial planner, it is written down and it is regularly reviewed.
It is these combined disciplines, highlighted in the paragraph above, which work. And it is because they are combined that they work!
How many people ‘segment’ the parts and lose efficiency as a result? Too many people disconnect the bits – they do not connect tax planning, with protection, with future scenario planning and with their retirement requirements. They organise their finances in compartments and do not ever connect any of this to their lifestyle requirement.
Turning back to a business, especially businesses which are smaller owner/managed businesses (where the owner’s finances are directly linked to the success of that business), are the financial planning disciplines not equally applicable – as they are to the individual situation?
How many businesses look at structuring a plan – written down and stepped out well in advance – which connects where they are today with their future stated future goals?
Businesses which represent the owner’s income stream, their family’s protection against ill fortune and their retirement prospects need to adapt financial planning principles to succeed. Because the business is not separate to the individual’s requirements. It is integral to them. Therefore the joined up, holistic, nature of good Financial Planning will create multiple benefits.
If you are in Business ask yourself this – do have a written plan which expresses how your business is going to support your longer term goals (including your lifestyle goals)? Do you have regular reviews with a financial planner to ensure that your business (and your family) is properly protected against the death of a key person or against a serious illness striking? Do you ensure that everything is structured to maximise tax efficiencies?
Each of the key component parts of the individual financial planning process apply to businesses. Equally the principle of making sure each part is worked into a joined-up plan applies.
In this respect every business should employ the financial planning principles. There is no reason why financial planning should be segregated just for individual’s use. Especially today where so many people are self-employed, running, building or owning businesses where their individual (and family) finances are essentially inter-linked with those of their business.