It can be difficult to find time to work on the financial wellbeing of a small business, but according to financial adviser and author of On Your Own Two Feet, Helen Baker, it is time worth taking. She told MPA about the five most common money mistakes of time-poor business owners and how brokers can avoid making them.
Not getting financial advice
Business owners often claim they are too busy to seek advice. Since they are time poor, they don’t set aside enough time to work on the business and forego the important process of engaging a licensed financial planner. This results in tunnel vision, said Baker.
“Over all the years I have worked in this industry I have come to realise people don’t know what they don’t know,” she said. “They make mistakes because of this and lose out on opportunities because they’re not getting advice.”
She recommends setting aside time to speak with a financial adviser, adding that while many business owners will engage an accountant, a financial planner can offer advice on areas that accountants can’t – making both necessary partnerships to forge.
Not making contributions to super
Since it’s protected from bankruptcy and creditors, superannuation is an important way of providing for retirement in the possibility that the business falls over. But according to Baker, many business owners either don’t contribute to super or fail to maximise the opportunity that super provides in favour of a focus on cashflow.
“When you run a business, the risk is that it could go bust or eventually be worth nothing, think Blockbuster video or nurseries in times of drought or floods,” she said.
Not having an exit plan
Not only do many business owners have little or no super, they also don’t have an exit plan – something that is essential from day one, said Baker.
“If all your eggs are in the business basket and something goes wrong with that business and if you haven’t put money away for super then you run the risk of having nothing for retirement,” she said. “You always need to have an exit plan in case anything happens.”
Read more: 6 ways to start exit planning now
If an exit plan is aimed at retirement but you are still decades away from this, there is greater risk that the plan will become obsolete as market conditions change. Even so, Baker recommends having one in place that is lose enough to tweak as the landscape and your situation evolves.
Not insuring themselves and their key partners
Not only should business owners insure themselves, they should also insure their partners or key staff, said Baker. If you or your partner gets sick and can’t work, this will provide funds from which to pay a replacement, enabling the business to continue running without you falling into duress.
Not setting up the “Five Foundations”
According to Baker, it is important to have the following five foundations in place to ensure the financial stability of a business:
- An emergency fund – this can prevent against getting into high-interest debt in the case of an emergency or provide funds to cover the ebbs and flows of cashflow
- Cashflow management – this includes looking at all the costs of the business including marketing plans
- Insurance cover – insurance should cover yourself, partners or key staff, the premises and expenses
- Superannuation – this could include a SMSF that makes sense for your personal and business linking together
- Estate planning – this should look at your partners, your exit strategy and how this is documented and could include a buy-sell agreement that deals with the transfer of wealth.