A key principle of financial planning involves diverting a regular amount from a salary/income into various investment wrappers such as pensions and ISAs. However, the reality of an entrepreneur’s finances is often irregular and varying in amount.
This ultimately means that the financial planning experience for business owners and entrepreneurs will be different to those who earn a certain salary.
Here we look at some of the ways entrepreneurs can use and access financial planning principles and advice.
Ensure flexibility
Entrepreneurs earnings can vary, substantially at times, and by nature they may have one or more business ventures on the go at any one time – and these may vary in their success from one year to the next. Factor in the potential for business sales, and the unfortunate cases where business ventures fail, and you can soon build up a picture of the uneven nature of an entrepreneur’s income.
Building an investment portfolio can be quite challenging when you are not earning a consistent income. However, this doesn’t mean it is impossible.
Many business owners may choose to make contributions to their investments as company funds become available. This may be at intervals throughout the year, or in many cases, in the form of an annual lump sum before the company year-end or indeed the tax year-end. If approaching investments in this way, it’s important to be mindful that deadlines and allowances will mainly ‘reset’ on 6th April each year, so if contributions are not made in time, these allowances may be missed.
Ensure you have adequate risk protection in place
Salaried workers, especially those working for large corporate organisations, will often have the security of a death-in-service policy, sick pay, and possibly private health insurance. Entrepreneurs are heavily reliant on their own health being intact to be able to work and generate an income for the business. There are a range of insurance policies available to protect the business owner or a key staff member against illness, injury, incapacity, or death. These include Income Protection, Term Assurance (life cover), Key Person cover, Relevant Life cover and Shareholder Protection. When structured properly, most policies are also an allowable business expense.
Ensure you have an emergency fund
Just as we would recommend to all clients, the starting point of a sound financial plan is to have a separate emergency fund amounting to around six months’ worth of income (as a minimum). An emergency fund should be an accessible pot acting as a backstop in the event of main income sources reducing or stopping altogether. It should provide instant liquidity rather than needing to withdraw money from an investment portfolio, which if done at the time of a market downturn, could mean you get back less than you put in. Due to the potential income fluctuations entrepreneurs may face in any given year, an emergency fund is arguably even more important than it is for salaried investors.
Instead of thinking the financial planning experience isn’t for them, entrepreneurs should instead be working with a financial adviser who understands their needs and that some months and years will allow for greater and lesser levels of investment. Gresham Wealth Management work with many business owners, so we understand that there are many factors involved – and planning decisions will need to consider both business and personal goals.
We work with our entrepreneurial clients to review their circumstances, at least annually. As such, we can tailor financial plans on a regular basis to ensure they are suitable for their business activity at that given time.