If you were asked what are your greatest business assets, what would your answer be?
You, your clients, your staff, your business properties, your business bank account, your receivables.
In fact, all the above are true however many people miss two very important Assets: -
(1) Your ability to generate personal income from your business now and in the future
(2) Thefuture release of income from the sale of your business
1. Personal Income v Business Income
As SME owners we are all so busy managing the day to day operations of our business that sometimes we forget what it’s all about…money in our personal pockets. I am emphasising personal because its critically important to differentiate yourpersonal bank account from the business bank account.
Why is it so important to differentiate between Personal and Business assets?
I have worked with clients in the past who’ve had large amounts of cash sitting in the Company’s bank account, which they’ve counted as their own personal cash. Unfortunately, some of these clients Companies got sued and it resulted in the company’s assets being frozen and in some cases liquidated. That was a massive financial hit for the clients as they were counting on having that money for their own personal use.
We may need to leave funds in the company just in case there is a cash requirement, however this needs to be very tightly managed and leaving large amounts of undistributed profits in the company is a dangerous way to go.
How do we most effectivelytake income out of the Business?
- Advice Ensure that you take enoughout of your company so that you can live comfortably and also build up a savings/retirement fund.
- Solution Ideally you need to take money out of the business in the following ways: -
- 80% Salary split into Needs (Housing|Utility|Food|Kids) & Wants (Holidays|EatingOut|Travel|Entertainment)
- 20% Savings & Retirement
ACTION POINT - Set up a Company Savings & Retirement plan for you and your key staff. It is easily done and can be a very smart way to build up an accessible pension from your company earnings. It also is an excellent way to attract and retain key staff.
2. Future Sale of your Business
Many clients are constantly reinvesting their funds back into the Business with the goal in mind that the better and bigger the business is, then the bigger the sales price they will get when they sell out.
That’s sensible as far as it goes however there are risks involved that need to be controlled.
DANGER 1 - Market Crash
If you have reinvested a lot of your profits back into the business and you’re confronted with another 2008 type crisis, then you will potentially be faced with the problem of not being able to sell your business at anywhere near the asking price you were hoping for.
In fact, in 2008 most business owners who were planning to sell,eventually had to sell for discounts of between30% to 50% just to sell their business and retire. This is a nightmare scenario and can be avoided with some sensible planning in advance.
By making sure that you are taking funds out of your business each year (without impacting your company’s ability to trade) you are making sure that you are protected against another 2008 type scenario if it should happen.You have more personal cashflow and a stronger cash bufferzone which will allow you to ride out any market challenges.
- Advice - Don’t put all your eggs into one basket. Invest your company profits in to your personal portfolio and ensure that it is well diversified.
- Solution - You can review your company finances half-yearly and do top ups into your Personal Portfolio which will be diversified by Asset, Sector and Location. This allows you to take profits from the company in a consistent and controlled manner.
ACTION POINT - Set up a Personal Portfolio plan with an initial Lump Sum and top it up from Distributable Company profits as and when you can. This is a great way to protect and build a very mobile investment fund and avoids any dangers around timing, legals and market volatility.
DANGER 2 - Partner/Shareholder/Director/Key Staff Dies or become Critically Ill
If you or one of your key Shareholders/Partners/Directors/Staffdies or becomes seriously ill, then the sales value of your business and its ability to operate can be impacted significantly.
- Advice - Make sure that you have insured your company to cover the above scenarios
- Solution - You can put a specific cover in place and update your Company Memo and Articles to ensure that in the event of death or serious illness you and your company are protected.
Click here to have a look at the video to see how this works
One of the key attractions to having this type of protection in place is that it makes your business much more attractive to potential investors and buyers as they can see that your businesses key assets are properly protected.
As a member of Creative Zone you are entitled to a complimentary review of your Business & Personal Assets by Bill Anderson of Abacus Financial Consultants. This includes a report and recommendation which will highlight any gaps you may have in your setup.
Expert Financial tips supplied by our coporate partner, Bill Anderson of Abacus Financial Consultants- A Financial Consultancy Company based in Dubai which specialises in taking care of SMEs.