Business tips in a volatile climate

Careful financial planning for your business is always important – all the more so in a volatile economic environment. This week, we talk about some of the key considerations you should bear in mind when setting up a business.

Having a robust roadmap for both your nascent business and your own personal finances will give you the structure that you need to ensure that all of your efforts end up paying off. Director of Private Clients Nick Rolf discusses business financial planning in a volatile economic environment and shares his top tips for established business owners, as well as people setting up a business.

In these testing times, it’s a good idea to make sure that you have sufficient cash in your business as working capital – money available to meet your current, short-term obligations. Sure, investing is important (and we will come onto that later on). But do not expose everything you’ve got to high risk. Avoid investing too much in something like equities – just because you think what you have might be surplus to requirements. Indeed, with interest rates on their way up, there are now some attractive cash rates available for corporates.

You’re probably well aware by now that the main rate of corporation tax is set to increase from 19% to 25% for companies with profits over £250,000 on 1 April 2023. This change means multiple considerations. Is it in your best interests as the company owner to maximise profit? Might it be better to pay people higher salaries to reduce profit – particularly if you are a small business owner? If you are paying yourself a low salary to generate more profit, you pay more tax on those profits and distribute a dividend. It might simply be better to pay yourself a higher salary and have less profit on which to pay corporation tax. How to extract profit from your company in the most tax-efficient manner is something to be investigated with an accountant.

Given the amount of time and effort that people put into building up their company, many business owners have a tendency to view it as one big pension pot. But in economically uncertain times, this can be rather risky. You may have gone into business in the belief that you will one day sell it and then live off the proceeds during your retirement. But with the numerous headwinds that many business owners are currently having to contend with, it may take longer than you initially thought to sell your business. Or its worth might be significantly less than you had hoped – in any case, less than you need to fund your retirement.

Given the impending increase in corporation tax, pension contributions are suddenly a lot more attractive as a way of extracting money – in a more tax-efficient way – from your business. If, for example, you have made one million pounds in profits and you give half a million pounds worth of pension contributions to key directors, then you’ve only got half a million on which you need to pay 25% corporation tax.

You will doubtless have ensured your business premises and your various other tangible assets. But your most valuable asset is actually the people with whom you work – the people whose expertise and experience form the bedrock of your business. And you yourself, as the business owner… you are the business. If you or any of the key people in your business were suddenly to die or suffer any long-term incapacity, would your business still be able to operate? Do you have what you need in the way of protection and liquidity in the business to go and recruit new talent or replace any of these key people? Having adequate arrangements in place for doing this is crucial for business owners.

Don't disregard the other strategically important people in your business operation. If a key salesperson were suddenly to die, then who would manage a particular sales relationship? What about shareholders? Review your shareholder agreements and think about what would happen if your business were suddenly to cease trading or merge with another. Would shareholders simply be able to sell their shares? During times of economic volatility, it is particularly important to be fully aware of any implications that these developments might have.

When you are in the thick of it and toiling away at building your business, leaving it is probably the last thing on your mind. But it is worthwhile planning as far ahead as possible.

We can talk to you about issues such as tax planning, business relief and inheritance… and help you work out exactly how much you will need the sale of your business to generate for you to have the life you want. We can help you determine how much your future lifestyle might cost, and work out whether or not the potential proceeds from the business – together with your pensions, investments and other savings – are likely to be enough. We can also talk to you about what to do with those proceeds and profits. After all, you may end up with a heftier tax bill than you were anticipating. It is better to realise that sooner than later.

Selling a business can be a life-changing experience, and exiting your life's work can give rise to numerous challenges. Before you embark on something so monumental, make absolutely sure that you have spoken to the right people and sought the advice of those who can offer you the help and guidance that you need.

Starting up a business is a risky venture. You might have 30 to 40% of your money tied up in it. You most likely have a property and a share portfolio as well. But it is important to look at the overall structure of your wealth and try and determine where the risks are. Really, this is just about diversifying your overall investment strategy and investing across other asset classes (such as equities, bonds and cash). This will help to cushion the impact on your long-term financial health if your business does not deliver the returns you were hoping for.

Your business forms one component of your overall investment strategy. And how much you put into other asset classes will be determined by your personal time horizon, your financial roadmap and – of course – the relationship that you have with investment risk. Our relationship with you involves us looking at how well your business is doing and integrating it into a diversified portfolio that is compatible with your financial roadmap.

Everybody goes into business with the best intentions. But being a successful entrepreneur is about so much more than just coming up with a good idea. It is crucially important to surround yourselves with good professionals – accountants, lawyers and other advisers – who can help you stress-test worst-case scenarios. They can help you ensure that your foundations are solid. And there are numerous ways to keep people on side and maintain their levels of engagement once you have hired them. At Investment Quorum, for example, we have Enterprise Management Incentives. This is a tax-advantaged employee share option scheme that is particularly relevant for smaller fast-growing private companies. But there are numerous other share ownership schemes available – ways to incentivise talent and ensure that the people working for the company are aligned with its needs. These are ultimately your needs.

Investment Quorum can put you in touch with the right people at the right time. And we can draw on our professional network and leverage its expertise – there are bound to be people who have been in your position before who can share their experience. If an idea is taking shape in your mind, be sure to talk to us about it.