• 20th April 2016

    Investment Management

    Managing your finances as an entrepreneur

    Britain is a nation of entrepreneurs, with hundreds of thousands of us running small businesses and following our own dreams. And numbers are steadily increasing, with a record-breaking 608,110 new start-ups registered at Companies House in 20151.

    “The UK has sustained start-up activity despite the economic recovery providing employment opportunities in established businesses,” says Luke Johnson, chairman of the Centre for Entrepreneurs. “We have seen a record number of new businesses created for four consecutive years, proving that entrepreneurship has become engrained within the UK’s business culture.”

    Almost 5% of the UK population are entrepreneurs, according to Approved Index. If you are amongst that number, here are some top tips to help you manage your finances better.

    Don’t keep all your eggs in one basket

    Your focus may be on making your business the best it can be, but it’s important that you diversify your investments. Saving into ISAs and investing into other assets helps protect your wealth in case your business fails, or you sell it for less than you had hoped.  You should remember the value of investments can fall and you may get back less than you invested.

    “Every year you should be making the most of your ISA allowance, especially if you are a higher-rate taxpayer,” says Jamie Alder, a divisional director of financial planning at Brewin Dolphin. “All your wealth shouldn’t just be hedged on the performance of your business.”

    Plan for your retirement

    “Quite a few entrepreneurs see their company as their pension fund, which is quite a risky mentality to adopt,” says Matthew Sullivan, a divisional director at Brewin Dolphin. The easy assumption to make is that you will sell your business when you want to retire and it will be your pension. The problem is your company may not prosper as well as you have hoped and you may be left with no retirement savings. Alternatively, you could find that your company isn’t worth enough to fund your retirement.

    Making contributions into a pension will mean you are building up a secure retirement nest egg and it is also a really tax-efficient way to save. As the owner of your company you can make your own tax-efficient savings into your pension, and you can also make employer contributions.

    Think about your exit

    “For those starting out, this will seem a long way off and be bottom of the priority list. But, thinking about your exit early on can reap rewards in the future and benefit from tax efficiencies when you leave the business,” says Paul Latham, managing director of Octopus Investments.

    If you are hoping to leave your business to your family you may qualify for Business Property Relief, which can mean there is no inheritance tax to pay on your company, says Latham.

    If you want to sell your business in the future then it pays to work out your ‘lifestyle number’. That’s how much you would need to make from a sale in order to achieve the lifestyle you want.
    Consider who the buyers for the business might be, whether it could be a rival, a large player in the same area of business. Think about succession planning and whether you need to find good people to carry on or whether the business would lose a lot of value without you running it.

    Also, remember exit doesn’t need to be a sale, it could even be an IPO – a listing on the stock market which gives you liquidity and access to shares, although you would need to build up a sizeable company to make this cost effective.

    Protect yourself

    “You are your business. If you were to die or suffer an illness that meant you couldn’t work, potentially the business is finished,” says Alder. “So protection is an important thing for entrepreneurs.”

    You should consider whether you need life insurance, critical illness cover or income protection cover.

    Surround yourself with experts

    “You may know your business back to front but when it is time to sell you need to build a team of experts around you,” says Sullivan. “This will include accountants, and solicitors, but it should also include a financial planner who can help you check you have the right protections in place and have correctly calculated how much money you need to fulfil your objectives – your ‘lifestyle number’.”

    There is a lot more to being a successful entrepreneur than just having a good idea. Your business needs to be built on solid financial foundations so it can grow to be a success.

     

    The value of investments can fall and you may get back less than you invested.

    Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change.  Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.

    No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.

    The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

    1 Source: Experian

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