Sometimes its hard being a business owner.

What happens when you get used to a certain way of life that just doesn’t fit with the peaks and troughs of business success?

Starting a business is not a job, it’s a whole lifestyle. It’s long hours and sleepless nights. It’s risking personal funds and taking a leap of faith. Then one day, almost without you noticing, the bottom of the balance sheet has gone into the black. After all this time and hard work, it’s a success.

Now what?

The long-awaited reward

After years of sacrifice and uncertainty it is only natural that when the business takes off you’d feel entitled to some element of reward. That could come in a variety of forms but perhaps the most common, in my experience, is increasing personal draw from the business.

This of course would be a perfectly natural choice to make. At long last you can take the family holiday that has been put off for years, upgrade the car, buy a home that fits the family. Very quickly all of these things can shift to the new normal and can begin to represent the success of the business you worked so hard to build.

But what happens when you get used to a certain way of life that just doesn’t fit with the peaks and troughs of business success? All businesses sometimes have a bad month, or quarter, or even full year. Unfortunately, life isn’t quite so flexible, as 67% of business owners in our recent study stated that their family is dependent on the income of the business. There is a balancing act to be performed between personal finances and business finances, and identifying risk is important.

It can be easy when things are going smoothly to begin viewing your income almost as a fixed business cost, similar to that of an employee. The danger surfaces when the lines blur between being a business owner who works for the business as opposed to looking out for what the business needs. As I advise my clients, strategically planning for the business means having the resources available to invest where investment is needed, and not having those funds tied up elsewhere.

The financial balancing act

Keeping income and expenditure separate can prove a challenging task, as so much is intertwined. The key is to create plans for each that are forward looking and not emotionally biased.

From a business perspective, forecasts need to be developed to inform full business plans. Moving past a financial forecast for the bank to a strategic, long term outlook that can inform business decisions. Outlining a planned annual spend is not sufficient, it is critical to identify and plan for investments that may need to be made going forward to achieve desired growth.

Again, the struggle to differentiate business from personal funds is seen, as 30% of business owners we spoke to have admitted to putting off financial investments in the business due to their need to draw personal income. This is clearly at the detriment of the business, as delaying the purchase of new technologies, updating equipment or hiring qualified staff will surely impact future profits. I have seen business owners claim, much too often, that their hands were tied, that they had no choice, but that’s not strictly true. It’s just that they made the choice in advance, by committing to a lifestyle that wasn’t ultimately sustainable.

This exposes a critical need for business owners to spend time looking at their personal finances as well, and how neglecting this could adversely impact their businesses ability to weather the storms ahead. Worryingly, nearly half (44%) of business owners have said that it would be difficult to reduce the income they draw from the business due to personal financial commitments. We know business owners are often risk takers, but when it comes to family and lifestyle that’s not a comfortable place to be.

By first looking at the long-term sustainability of the business and reliability of income stream it is easier to make informed decisions about long term personal financial obligations. This then leaves opportunities open to potentially diversify your income stream through alternative investments or pensions. Ultimately, ensuring that you are not too heavily reliant on the income from the business.

To look at business owners financial pressures and benchmark your wealth against other business owners, visit our wealth benchmarking tool.

 

Karen McLellan
Managing Director, Haines Watts, Hereford

30% of business owners have put off significant investment in their business because of the need to draw a personal income

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