Banking and finance are pressing issues today. Some businesses suffer from not balancing their books or managing money wisely. Jonathan Sidlin, Financial Planner and Managing Director of HSC Financial Advisers, tells Intelligent CXO how companies can take control of their finances and move forward, stronger than ever.
For many business owners getting a hold on finances across the year is critical to business success. The very nature of business means that finances are constantly fluctuating with bills, staffing costs, materials, rates, taxes, along with invoices and payments for services and products incoming and outgoing at different times.
With no clear parameters on outgoings and expected incomings, things can quickly become a mess and difficult to unpick. Here is the reason for good financial planning from the outset. Projections and forecasts of outgoings and incomings are initially the very basics that a company can undertake but there is so much more that can be achieved by implementing financial strategies for success.
Taxes and planning ahead
Whenever I look at companies with large amounts of cash on their balance sheets, I sometimes shudder at the thought of the inordinate amounts of tax paid in order to hold that money. Although 19% corporation tax on profits may not seem like an extortionate amount for businesses to pay, that is usually only the start for business owners.
Keeping cash in the bank is, of course, a necessity for cashflow but in times of high inflation, such as we are in currently, it could be a poor way for a business owner to store their profits.
This is particularly topical given the intended rise in corporation tax for companies with business profits of more than £250,000 from 2023. So, the idea of seeing large sums of cash on the balance sheets may not be quite as appealing given that up to a quarter of the profits within the business could be lost in tax!
Working with a good accountant, alongside a financial planner should help provide business owners with clear financial forecasts and projections on taxes within the business. These forecasts should help enable business owners to judge how much to set aside each month, ideally in a separate account so it can’t be touched, for example corporation tax can be planned for at regular intervals.
Capital and planning
If you ask the average small/medium size business owner with large amounts of capital consistently on their balance sheets what they are doing with that money (aside from the usual working capital of course) in my experience many are unable to give a definitive answer.
In my experience, business owners sometimes need to be reminded what they are actually working for and to always ensure that they pay themselves first. Many business owners baulk at the income tax, increased dividend tax and National Insurance which they have to pay to extract money from their businesses.
This is where a good financial plan comes into its own. When business owners work with experts, they should be able to plan in advance the amount of working capital they anticipate will be needed over the next 1- 2 years in order to grow the business. A percentage buffer should then be added on top of the expected corporation tax bill in order to allow for any unanticipated expenditure.
Tax efficient products
The next step is for business owners to potentially look at tax efficient products such as pensions and investments in order to plan for their own future and retirement.
By exploring investment opportunities, the company may also add to their revenue streams, as if the investment is successful, the business could reap the benefits in the medium to long term. The money is, in effect, working hard for the business.
Pensions could be seen as a good option to increase personal gain and with a wide range of products available this is one area that expert advice should be sought to ensure the best return is seen.
Business owners should also look at other areas of their lifestyle and personal finances to see if any improvements can be made. Mortgages, energy bills and insurance policies are all areas that should be checked and review at regular intervals. With interest rates currently low, now maybe a good time to review mortgage rates and assess any fixed term deals to avoid any future rising interest rates. Energy prices are also currently seeing an all-time high and by being aware of the current plan and shopping around for the best deal, tangible savings could be achieved.
Life cover, critical illness and income protection cover are all options for individuals wishing to protect their lifestyle and loved ones if the worst were to happen. These products may seem to be costly, but they are all key considerations as part of any financial plan.
Writing and sticking to a financial plan is essential for every business to ensure that are bases are covered and there is sufficient cash flow available for peace of mind.
Working alongside financial planners, accountants and management consultants could prove to be beneficial for business owners and entrepreneurs wanting to achieve financial fitness and explore potential opportunities for personal and business growth in the years ahead. If there is one thing every business owner should prioritise in 2022, it is a robust financial plan.