S1 E12 Business Owners

On this weeks episode of the Money Mentor Ken discusses Financial Planning for Business Owners. Why be a business owner and how successful business owners can transfer company profits into personal wealth. 

team@money-mentor.ie

www.money-mentor.ie

https://www.amazon.com/Myth-Revisited-Small-Businesses-About-ebook/dp/B000RO9VJK

https://www.amazon.com/Getting-Naked-Business-Shedding-Sabotage-ebook/dp/B0032ZD0OI

https://www.amazon.com/Blue-Ocean-Strategy-Uncontested-Competition/dp/1591396190

https://www.imdb.com/title/tt2005151/

https://www.imdb.com/title/tt2582802/

Thank you for listening - Money Mentor Team

Transcript

Hello and welcome to the money mentor podcast the podcast for your financial education. I'm your host Ken Mason. On this week's episode, we discuss financial planning for business owners. A business owner is any person or persons who set up an enterprise to trade goods or services for profit. legal business structures include sole trader, partnership, limited company and public limited company. The size of a business can be micro one to 10 people, small 10 to 50 people medium 50 to 250 people and large 250 people and above, there are four stages to the business lifecycle, launch growth, maturity, and decline. Owning and running a successful business is a tremendous feat given the casualty rate of many businesses over time. serial entrepreneurs know that you either win or you learn failure and setbacks are part of the process of becoming successful. Ireland is a small open economy that attracts multinational companies for a variety of reasons. We benefit greatly from the jobs these global businesses create both directly and indirectly. There are also 250,000 small and medium sized businesses in Ireland accounting for 99% of all businesses in Ireland. These businesses collectively employ 1 million people, Irish businesses and their owners are the backbone of the economy. In many instances, business owners are the business driving the strategic direction and day to day decision making within the business. Being a business owner. It means that personal financial success is dependent on business success, there are significant financial and personal sacrifices in being a business owner. The time and money required to launch survive, grow and hopefully thrive is substantial, it can be all consuming. So why be a business owner? For many it is the cut and thrust of competition, creativity, autonomy, professional growth, and of course the financial rewards. Having direct control over our own financial future and belief in our abilities to achieve success is a major motivating factor. A successful business is one of the best wealth building vehicles available to us. It can create and store wealth based on its productivity. The goal is to transfer this wealth from the business to the owner tax efficiently. This is achieved through many of the same mechanisms available to employees. Businesses have allowable expenses and some tax incentives when selling a business and allowable business expense must be wholly exclusively unnecessarily incurred in the running of the business. for business ownership to be worth it, the rewards need to outweigh the risks. This begs the question What should the rewards be given the risks in theory, the reward should be better than being an employee in the same line of work. Therefore, we can use being an employee as a benchmark for business ownership. The benefits of being an employee can vary drastically depending on the industry, job responsibility and level of skills required. Basic pay is a good place to start, a successful business owner should be aiming to earn the same if not more than the employee equivalent basic salary. Ideally, a business owner will have calculated their required level of income to live the lifestyle they want during and after their working lives. This level of income provides an anchor or baseline level financial goal that the business needs to achieve. In order for the owners to be successful. An employee is contracted to complete certain tasks and works a set number of hours a business owners tasks are varied and can be endless, requiring many more hours of work, it needs to be worth our time being a business owner. The income per hour formula discussed in Episode Two will help us determine if we are better off financially. The more hours we work, the more we dilute our income per hour. Of course Employee Benefits don't stop at base salary. Many employers currently pay or subsidize private health insurance, income protection, life insurance, pension contributions, additional annual leave Flexi time, bike to work, taxsaver commuting, bonus incentives, overtime, food, gym, social events, professional and education fees and so on. These perks are in addition to our base salary, employer supplied work benefits are used to attract the best people

Our company's human capital. Its people are one of its most valuable assets. the right team and company culture can do wonders for a business and ultimately lead to less employee turnover a costly business expense When evaluating our employment package, we need to attach a monetary value to these benefits and not just solely focus on our base salary over time and bonuses, we need to ask ourselves what is the replacement cost of these additional benefits. As a business owner, we need to remember how important these benefits are and how much we will need to replace and improve upon them. Even if these benefits are not part of being an employee in our industry, it's important we factor them in to our financial goals being a business owner. Here is an example of some of the costs attached to employment benefits with a base salary of 80,000 euro per year. private health insurance costs 2000 euro per year benefit you and your family are looked after quickly in the event of an accident or ill health income protection cost 1200 per year benefit, we continue to receive up to 75% of our income if we were unable to attend work due to injury or illness. Death in service costs 600 euro per year benefit a tax free lump sum of four times our base salary, which in this case is 320,000 Euro in the event of our death 10% employer pension contribution cost 1000 euro per year benefit free money employer receives tax relief on the pension contribution and it does not affect the employee pension contribution relief. Five days additional annual leave cast 1538 euro benefit more time spent on vacation with family and friends. These costs are borne by the employer. These are just some of the core perks an employee may be entitled to as part of their employment. The combined replacement cost of these employment benefits is 13,338 euro that's on top of a base salary of 80,000 euro for a total employment package of 93,338 euro these baseline level employment benefits are generic they're uniformity means they are not wholly comprehensive to our unique circumstances. Some employers pay a higher base salary but do not provide additional employment benefits. Whether we get none some or many of these benefits, they should be a top priority as an employee and as a business owner. This is because it won't be done on our behalf. There is a greater concentration of personal and financial risk being a business owner given personal success is dependent on business success. The previous 11 episodes are a chronological roadmap to personal financial success if implemented. There are many parallels between good personal finance and good business management. as business owners how we allocate our time across the functional areas of a business is critical to its success. auditing how we spend our time and prioritizing what matters most of the business can reveal a lot. using technology to automate tasks delegating to employees or outsourcing to third party providers where possible can free up valuable time, the value of a good team and support network in the form of family, friends, staff, suppliers and other stakeholders cannot be understated. personal, professional and financial goals keep us honest and focused. remembering why we are doing what we are doing may seem obvious, but it can get lost on us over time, doing more of what makes us happy and less of what doesn't is the aim. Sometimes what we truly value and how we spend our day to day lives are out of sync. As the author Peter Drucker says, tell me what you value and I might believe you but show me your calendar and bank statement and I'll show you what you really value. Identifying our personal and financial goals can help determine what the business needs to achieve to meet these goals. You know your business best it might sound obvious, but a business should have the following objectives. obsess over the client experience and journey know how much the business costs to run. Spend less than the business makes by keeping costs lean. Save one month's worth of business costs as a buffer pay off all debt save six months plus of business costs in an emergency fund, manage and plan cash flow,

Identify and explore areas for growth. Explore scalability options, diversify income streams be say already, profitability for a business is the same as savings rate for a person. Both are fundamental to building wealth. To better business profits are the more options a business will have. We can reinvest in the business, take it a salary, pay a dividend or contribute towards a pension. being financially organized is an important part of being successful in business. personal and business finances need to be kept separate being financially organized allows To have a clear view of our cash flow when it comes to business cash flow is king. spending more than we earn can lead to debt and building debt is risky and unsustainable personal financial organization is discussed in Episode Four. The value of good accountancy software, a good bookkeeper, accountant and financial planner are not to be underestimated. many business owners recognize the value and benefits in the skills of others. much in the same way clients recognize the benefits and skills of their business. Part of being a leader is utilizing the strengths of others. personal protection and business protection have many parallels, business owners can protect themselves and the business through the business, human and business insurance is all about protecting people the business and death. Small and medium sized business owners are often the driving force of their business. From a risk perspective, this can be a blessing and a curse. Business owners reap the rewards of their effort, skills or knowledge in growing and driving the business forward. But at the same time, the business can be highly over Reliant and dependent on the business owner to succeed. All our eggs are in one basket so to speak. Exposure to risks outside our control can threaten the long term viability of the business. such risks are accident, serious illness or death. In larger companies, these risks are less concentrated and spread out among management and employees. If a small or medium sized business owner or key employee to the business were to become seriously sick or die, it can jeopardize the survival of the business, as they say hope for the best plan for the worst. If an employee is invaluable to the future success of the business due to their unique skills, business contacts, management expertise or business knowledge the business can insure them through key person insurance discovers the company if the key person becomes seriously ill or dies, policy proceeds can be used to repay debt replace loss of earnings and recruit a replacement. A sole trader can take a personal cover as discussed in Episode Six. Partnership insurance is to protect all business partners and their families in the event of death, the policy proceeds are used to buy back the deceased partner's share of the business. This ensures the partners retain control and ownership of the business while the deceased partners family are compensated for their share in the business. shareholder protection is the same only it is for a limited company. shareholder protection can be implemented personally or through the business. The remaining shareholders retain control of the business and the family of the deceased shareholder receive payment for their share of the business. for business owners of limited liability companies profits are taxed at 12 and a half percent income tax is either 20% or 40%. Along with prsi and USC and company dividends are subject to corporation tax, dividend withholding tax, and in all likelihood, income tax prsi and USC two pensions are a great vehicle to extract business profits into personal wealth tax efficiently. What can be transferred is determined by our salary and service that is paying ourselves a regular consistent salary above the 40% income tax threshold over a number of years. The reason I say above 40% income tax threshold is so we can avail of the 40% income tax relief for pensions both the business and the business owner can contribute to the pension. The business pension contributions reduce the corporation tax liability and the business owner pension contributions reduce the personal income tax liability of the owner. If the business has sizable profits, there is also a pension catch up facility for those previously missed years depending on salary and service. It is not unusual for company directors to be spouses and both working in the business in some capacity. This provides further options for the extraction of business profits tax efficiently, it is important we maximize all tax incentives available to the business and business owners. The way a company is structured will mean there are different pension vehicles for different company formations.

Some business owners view their business as their retirement. This means we are financially dependent on the sale of the business which can be a high risk strategy. The aim of financial planning is to make business owners financially independent of their business. So regardless of what happens with the business in the future, we are financially independent of its sale. The sale of the business is icing on the cake rather than an absolute necessity. Being sale ready does not mean we are selling the business. It means that if we receive an offer we can't refuse or are forced to sell the business that it is in the best possible shape financially. To facilitate its sale, there are a variety of options when selling a business. He can be sold to family to company management, merging with a competitor or related business or a new entrant to seeking to who for market share. As briefly mentioned in Episode 11, retirement relief is capital gains relief on the sale of a business. If aged between 55 and 65. And we sell our business to a child there is no CGT payable if 66 and above there is a 3 million limit for CGT purposes. If selling a business to anyone else between 55 and 65, there is a 750,000 limit for CGT purposes and this drops to 500,000. From 66 onwards, this relief is per person. So if there are two directors and the company is not sold to the children, both directors can receive up to 750,000 euro each so long as they are between 55 and 65 years of age. This is another great way to extract value built up in a business tax free and for the business to continue into the future. Entrepreneur relief is where capital gains tax relief drops from 33% to 10%. On the sale of a business up to 1 million euro, a good financial planner can review and provide if necessary, the employment benefits and employee and business need for their financial future. What is a financial planner? a financial planner is a forward looking accountant, a financial risk manager, educator, coach and financial counselor. What is financial planning financial planning is the process of identifying our values, creating and prioritizing financial goals from these values and implementing a financial plan to meet those goals into the future. Financial Planning starts with the big picture and becomes progressively more granular the more defined our goals become. Here are a few of the value added services a financial planner provides financial organization we request you populate a fact find and risk tolerance questionnaire which consolidates all your financial information into our cash flow modeling software, cash flow modeling using financial forecasting software and conservative assumptions we project your current financial circumstances to age 100 value based goal setting, identifying short, medium or long term life goals that require financial resources. pragmatic planning can we afford another child can one of us afford to work in the home and raise the kids college tuition for the children a wedding home renovation or extension? upsizing selling the business or farm trip of a lifetime? Work sabbatical? downsizing buying a new home? When will I be financially independent? What happens if I get sick, injured or die? How much can I gift to my family providing some financial peace of mind and a focus to prepare financially for your future self and future events while making sure you are covered if disaster strikes, behavioral coaching, avoiding expensive money mistakes, stewardship during temporary investment market corrections and keeping you on track to meet your financial goals human insurance protecting people and death hope for the best plan for the worst tax planning across pensions and estate planning. In summary, being a successful business owner has many advantages. Business owners should have their own company benefits and maximize these to their personal benefit. Extracting company profits tax efficiently should be a top priority so long as the company is in good financial health. Much of what has been discussed in the previous 11 episodes for good personal finance is also applicable to good business finance, business owners can claim tax relief on the cost of professional services.


If you feel you could benefit from a financial planner, please let me know. I offer two levels of service The first being a pay as you go pre financial plan service that provides guidance on setting financial goals financial organization and debt elimination. The second being a full financial planning Service. A free 15 minute initial chat proceeds both service offerings. This week's book recommendations are the E myth revisited. Why most small businesses don't work and what to do about it by Michael Gerber getting naked a business fable about sharing the three fears that sabotage client loyalty by Patrick lencioni Blue Ocean Strategy how to create uncontested market space and make competition irrelevant by john Kim and Rene Melbourne. This week's Movie recommendations are war dogs, a massage therapist and guns dealer are awarded an arms contract by the Pentagon starring Jonah Hill and Miles Teller and whiplash an ambitious young drummer wants to be the best in the world. The movie tracks the music students practice sessions with a highly demanding mentor story Miles Teller and JK Simmons. This is the last episode in this season, and so I will be taking a few weeks break to prepare for season two. I'm aware of the podcast isn't conversational but felt it important to share some financial planning knowledge upfront so you can take action to improve your financial future. I plan to sprinkle in some interview shows in season two with guests you may find interesting from what I'm told I'm best listened to at one and a half times speed. As always, if you have any questions on this week's episode, ideas, suggestions or feedback for season two, please send us an email at team at money hyphen mentor.ie. We can also be found online at money hyphen mentor.ie. On through the website you can find our Twitter, Instagram and LinkedIn accounts. If you're liking what you're hearing, please subscribe and I will be grateful if you could leave a review. Please share with family friends and colleagues if you think they would benefit until the next podcast Thank you for listening, take care and chat to