5 Financial Foundations Every Business Owner Needs

by Helen Baker 1st of August, 2022

5 Financial Foundations Every Business Owner Needs

Poor financial foundations make for rocky ground on which to build a company. These are five financial foundations everyone in business should have. As a financial adviser, I suggest that every individual builds wealth using five basic financial foundations.

For business leaders, there is a company to think of as well as themselves and their family. Juggling both is no easy feat.

These financial foundations will help both your personal wealth and the business you lead grow strongly and sustainably:

1. Separating business and personal affairs

Work and leisure time, activities and connections are blurred like never before. However, when it comes to finances, and tax in particular, those distinctions remain important.

Pay particular attention to things like:

Depreciation: on home office furniture, equipment, electronics etc.
Expenses incurred while working at home that aren’t supplied or reimbursed by the company: e.g., utilities, mobile phone, stationery, parking, printing.
Education and professional development: job-specific training, professional and industry memberships, relevant subscriptions.
Advisers: Accounting, financial advice, legal, and managerial services.

Maintaining separation of business and personal affairs not only meets your compliance obligations, but also has tax benefits (such as claiming company GST credits) and avoids you being left personally out of pocket for company expenses.

2. Avoiding common mistakes

Common mistakes are common because people keep making them. Lots of people. Don’t become one of them! Avoid, for example:

Poor cash flow. Ironically, those with lean revenues perhaps appreciate that more than those with massive capital inflows. Because largesse often breeds complacency: both for companies and high-income earners.
Underpaying yourself. Business owners often don’t pay themselves properly – income or superannuation. “The business is my retirement plan!” they claim. All good if it becomes the next Google or Facebook. But if it fails? They’re left with nothing. Or devalued, extract value while you can.
Legal quagmires. Especially pertinent when relationships breakdown: marriages or business partnerships. And disputes can erupt among beneficiaries/relatives when a business owner dies without proper estate planning. These situations inevitably affect the business’s value and future as a going concern.

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3. Mitigating your risks

Risk mitigation is just as important personally as it is in business.

Conduct a financial risk assessment to identify your vulnerabilities – everything from natural disasters destroying assets to ill health or redundancy unexpectedly interrupting your earning capacity.

Examine what protections you have over your assets and your ability to generate income. Are your insurances – property, life and disability, income protection, professional indemnity etc – current? Do they offer enough cover and the best value? Do you have an emergency cash fund to draw on?

Establish contingency plans. What if you can’t physically get to work? How could you afford retirement if the company collapsed? Or your key person can’t work? How will your family cope should you or our business partner die prematurely or suffer long-term illness/disability?

4. Planning your exit

Surprising numbers of business leaders have no exit plan. Yet a smooth transition for both you and the business takes time and effort to implement.

Whether you lead a public company, private enterprise or your own business will influence how this process is managed, including:

When do you communicate your departure – to employees, investors, suppliers, and customers? How should this be staged?
Who will succeed you as CEO?

What knowledge gaps does the business need to fill once you depart?
What if any stock options do you have? When can/should you exercise them to maximise value and minimise tax?
Will you retire? How will you fund retirement?
Will you take another role? How will that impact your earnings, reputation, investments, even your quality of life? Will that move adversely affect the company you’re leaving?

Your own plans should be developed in parallel with the business’s, ensuring an orderly transition that doesn’t adversely affect the company’s value and prospects, nor your professional reputation.

5. Looking after yourself

While running the company and ensuring everyone else has everything they need, it’s easy to overlook your own wellbeing: physical, mental, and financial.

Your health, sleep quality, financial stresses, and mental clarity directly affect not just you but the company too in myriad ways:

Decision-making capabilities
Attendance and performance
Cognitive functions – memory, reasoning, attention to detail, concentration
Body language/personal image
Impulse control
Workplace culture
Healthcare costs

Looking after yourself directly improves your ability to create value, innovate, manage risks, and maximise opportunities.

Remember: A company has a board, staff, and advisers on hand to protect its future – your future, and that of your family, is all up to you!

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About the author

Helen Baker

Financial Adviser

Helen Baker is a licensed Australian financial adviser and author of the new book, On Your Own Two Feet: The Essential Guide to Financial Independence ...

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