Starting and growing a business is without doubt exciting and stressful in equal measure. There are many demands on a business owner’s time and it can be all too easy to overlook your own personal financial affairs. And that, says our Director James Johnson, would be a mistake.
First time business owners will find themselves in a very different position from their employed friends and neighbours. Gone is the secure and stable monthly salary, fixed holidays and generous pension contributions. Replaced with a potentially volatile income stream, the need to understand a new and complex financial language, a grasp of personal and corporate taxes, and hopefully, greater rewards.
“Business owners need to give thought to their own financial affairs from the very beginning,” says James, who advises entrepreneurs at Hillier Hopkins. “There will be those businesses expenses that need to be met, but also the need for a personal income to meet any home and living expenses. And how money is taken out of the business is important and will play a major role in the amount of tax paid.”
There are three ways a business owner can extract money from their business: they can draw a salary, take dividends, or a director’s loan.
“Most business owners will take a combination of salary and dividends taking advantage of the still preferential tax rates on dividends,” explains James. “The government changed the dividend tax rates in 2016, yet it remains an attractive way for small and family businesses to extract money, particularly alongside a salary.”
Another tax-efficient way to take money out of a business is into a pension. Contributions can be made by the company and attract considerable tax advantages and should not be overlooked.
The way money is taken from a business will change as the business grows. It is often more appropriate, says James, for a business owner and any co-directors to take a salary when it starts employing staff or wishes to attract external funding.
“As a business grows its structure too will change,” explains James. “And this becomes more of a priority when a business owner looks to exit the business. Here, it is important to show a mature business structure with a clear picture of costs, cash flow and opportunity for future growth.”
And whilst a sale or exit is unlikely to be on a business owner’s mind from the outset, it is something that does need to be prepared for well in advance.
“I would recommend to any business owner considering a sale or exit to start planning around five years in advance,” explains James. “Give yourself time to get the structure right, and that will extend to how money is taken out of the business, usually from dividends to a salary. Any future owner will want a clear picture of overheads and the opportunity to grow the business further.”
And finally, business owners need to understand the language of finance, and particularly the importance of a healthy cashflow. And choosing the right accountancy firm is key.
“Your accountant should be there to guide you on this exciting journey,” says James. “They should be there to help you understand and forecast cashflow, to provide you with a picture of likely tax liabilities and, of course, the compliance aspects of running a business. They should be an essential part of your team.”
If you would like further information or support, contact James Johnson on 01908 713873 or firstname.lastname@example.org.