Many entrepreneurs work hard to build their business into a successful empire. This is typically achieved by setting various goals and then working tirelessly towards them.
While being your own boss allows you to take control of your career, there isn’t anyone reminding you to invest in your future, you shouldn’t forget to also plan for your golden years.
Similar to business planning, financial planning should start and end with a list of clear objectives, whether over the short, medium or long term.
Once goals have been set, you can think of where and how to invest your money. When planning for building wealth to achieve lifestyle goals, the investment process for each entrepreneur will be different.
Short-term goals in your business are financial goals that will potentially occur in the next year. When planning for these goals, scenarios such as what will happen to your business if you become disabled or pass away, should be included.
You should not only evaluate if other partners in the business are able to continue running the business, but also ensure that you and your family will be looked after financially in such an instance.
Short-term financial goals also necessitate maintaining enough operating capital to cover basic expenses, which would include the provision of emergency funds to meet short-term financial fluctuations, such as seasonal lags where you are unable to cover your cash flow needs out of sales revenue.
These are financial goals that you are looking to achieve in the next three to seven years. It should include working on your business and not in your business.
Many entrepreneurial clients spend so much time working in their business that they don’t see the wood from the trees. Business owners need to start working on their business to be profitable and saleable in the future.
If you spend too much time working in your business, you run the risk of being the business and without you, there will be no business.
Long-term goals are typically retirement goals. As discussed above, you need to build up a business that is saleable in the future. Therefore, you need to start working on a succession plan.
As an example, entrepreneurs should start working on their succession plan 20 years before retirement. This could include transferring clients to colleagues early on in the relationship. The purpose of these transfers is two-fold.
Firstly, the client will know someone else in the business, should the entrepreneur be away, and secondly, the client will already have a relationship with another business partner when the entrepreneur decides to retire. This means that the business shouldn’t lose the client due to the owner leaving.
By starting succession planning early, clients are taken care of and the entrepreneur has an agreed annuity income into retirement.
Another long-term consideration is to also invest outside of your business. Don’t put all your eggs into one proverbial basket. Striking a balance between investing in your business versus your future is often a complex task for entrepreneurs while they are building their business.
It is therefore advisable to ensure that should anything happen to your business or should your business not realise at the price you planned for at retirement, you have other, more diversified, assets that will provide more certainty. Broadly diversifying your assets may help protect against risk, as your assets are divided among many types of investments.
You could invest into a Retirement Annuity Fund (RA), which is protected against creditors and insolvency in terms of legislation. RAs also offer you an opportunity to increase your retirement savings and obtain a tax deduction at the same time.
Should your business have access to a pension fund, you should assess whether you are contributing enough to your pension fund, as often the tax-deductible contribution allowance isn’t maximised.
The tax system allows a combined tax deduction for all contributions to retirement funds (e.g. RA or pension fund) of up to 27.5% of the greater of remuneration and taxable income, capped at R350 000 per annum. This saving is significant, and all investment returns within a retirement fund are tax-exempt, allowing for the compounding of investment returns over the longer term.
Putting all your money into a single investment is risky because you could lose everything if the investment performs poorly — even if that investment is your own business.
As each individual and their situation is different, there is no one-size-fits-all financial plan. It is advisable to contact a CFP® professional to assist in structuring a tailored solution that is in line with your identified goals – including business and lifestyle.
This article is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein.
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