The headline for this week’s article is a famous quote by Benjamin Franklin and something many are contemplating in the current financial era. Small business is often the first to take a hit during times of market contraction and correction, such as we have seen recently with the GFC. Financial experts repeatedly advise that the crisis is not over and that the trend will continue for the next few years so it’s important for small business owners to be financially savvy in order to remain profitable.
In lieu of that, this week we decided to focus on the nitty gritty topic of small business finance and had a chat with Rick Maggi, a financial planning expert from Perth based consultancy Westmount Securities.
A small business owner himself, Rick has over 26 years experience in the finance industry and is well aware of the pitfalls that can plague small business operators. We asked Rick to give us the low down on financial planning, superannuation and investment for small business and here is what he has to say about it.
What do I need to think about finance wise when starting a new business?
A well-defined business plan and plenty of liquidity. It’s really important that you have more than enough cash in the bank or access to finance before you begin trading. Of course, obtaining bank finance isn’t as easy as it used to be, thanks to the GFC, so be flexible and open-minded. Either way, be as cashed-up as you can possibly be to cover not only the lean times but to also give you extra firepower. A business plan, will not only be a prerequisite as far as bank finance is concerned, but it will also force you to define what it is you’re hoping to achieve and how you intend to get there.
What is a small business financial plan?
A small business financial plan incorporates not only the business plan but also examines issues such as cash flow management, superannuation, risk/insurance and estate planning. Definitely worth having, but don’t spend too much of your precious money on one early on, just make sure the basics, are covered. You can get more specific later on.
What do small business owners need to keep in mind during this time of market contraction and the GFC?
The obvious answer would be to keep your costs down both personally and professionally and stay liquid, be brutal if you need to so you can survive until conditions improve (and they will). The sad thing is that many really good small businesses fall apart during downturns simply because they run out of time and money. Having said that, you also need to strike a balance between fiscal prudence and going for growth.
The notion of preparing for a future of scarcity is currently selling well to audiences who are looking for greater certainty or predictability, which is completely understandable. As an investor or a business owner, it’s extremely important not to emotionally buy into a downturn as it can paralyse you with fear and, over time, condition you to crouch low and settle for less.
Time really is short, so unless you’re prepared to spend a decade of your life waiting for things to improve, continue to dream big, aim high and then don’t be afraid to act on your instincts. Flexing your decision making muscles will improve your bravery and confidence, even when you make mistakes along the way. It also helps to surround yourself with people who are just as optimistic and energetic as you are – cynics can be terribly exhausting and can drain your energy, that last thing you need during challenging times. To quote Steve Jobs, “don’t settle, stay hungry, stay foolish”.
Would you recommend insurance for periods of sickness or injury?
Yes, absolutely. When you think about it, your ability to generate income is critical and if your income stops, everything else will shift into reverse gear. There are plenty of online insurance options out there, but I believe that most people, especially small business owners, should still seek advice from a qualified financial adviser.
With people working longer and postponing retirement is superannuation really worth the investment or is it better to put my money elsewhere?
Superannuation is probably the most tax effective way to build your wealth and it should be taken very seriously, and early on. These days you can use your super to buy property, shares and a variety of other assets. Of course, how much you commit to super versus other forms of investment is the $64 thousand dollar question and it really depends on your personal goals and how quickly you’d like to achieve them.
Cash flow is always a headache for sole traders and small business. Do you have any tips on managing cash flow to cover lean periods?
Only the commonsense tips, primarily to save for a rainy day when times are good. You should also attempt to forward project by 12 months all of your expected income and expenses and if you can’t do it, pay someone to help you. Surprisingly, many small business owners don’t bother managing their cash flow and end up bouncing from one crisis to another – bad for business, not to mention your health.
Is it better to invest business profits or clear debt first?
The conventional wisdom is always to clear debt first, but I’m not convinced. The concept of regular saving and debt reduction is something that is difficult to argue against and is keenly promoted by the funds management industry, but I don’t think that works very well. While you certainly need to control your debt levels, I believe that people also need to take full advantage of business and investments opportunities as they arise, aim for growth, make more money and then pay off debt, in that order.
Are tax obligations best left in the hands of a professional? If so why?
Yes. Find a good Accountant, one that can listen and understand your hopes and dreams, welcomes random phone calls from you as you learn the ropes, and then take their advice. A good Accountant will set-up the right structure from the outset to ensure that your business is running efficiently and that you are personally protected. Don’t however expect your Accountant to be your business coach – that energy, focus and passion can only come from you and your partners.
How do I make sure my business will continue without me?
Insurance. Depending on the structure of the business (ie sole proprietor, partnership etc) you can take out various forms of insurance, such as disability income protection, life insurance and trauma cover. Some of this can be conveniently structured within your superannuation funds, but again, get advice from a financial adviser.
What tax concessions apply if I choose to exit my business?
Speak to your Accountant but there are a number of CGT tax concessions based on the length of time you’ve owned the business, the nature of your business or whether you’re moving into retirement.
How can a financial planner help and how expensive is it?
A Financial Planner, like an Accountant, a Lawyer and a Finance specialist can be an invaluable ‘team member’ on a number of levels. Typically a Planner can help you with issues such as superannuation, wealth accumulation and protection, tax, insurance, retirement planning and estate planning. But perhaps most importantly, a good Financial Planner will keep you focused on your goals, both personal and professional, acting as a sounding board on a variety of topics.
For this reason, you need to take time to find the right Planner and ensure that their remuneration structure isn’t conflicted. Find a Certified Financial Planner that charges a flat fee for advice, not a percentage or commissions and you’re probably on the right track.
So that’s it in a nutshell – pay yourself super, get a great accountant, manage risk with insurance and plan growth to ensure the success of your business. Don’t give up on your dreams and business goals just because of the financial naysayers who like to cast a heavy pall of gloom over the state of the economy. Oh and if you would like to get in touch with Rick about your own financial planning needs, details can be found on his website at Westmount Securities (designed by us of course)!