Financial planning for entrepreneurs

Starting and running your own business can be financially rewarding and emotionally fulfilling. But it is also demanding.

Entrepreneurs often face a wider range of financial challenges than employees. They may, for example, need to secure business funding as well as plan for retirement. So company owners require rigorous approaches to financial planning and business management to hopefully keep their venture on track and safeguard their financial future.

Setting clear financial goals is essential for entrepreneurs: they provide direction and purpose to the entrepreneurial journey. It is important to separate these into short-term and long-term goals.

Short-term goals concern immediate operational needs, such as managing business cash flow requirements, reducing expenses or increasing sales. Long-term goals involve initiatives aimed at growth and future prosperity, such as business expansion, entering a new market or achieving personal financial independence.

Keep personal and business separate

As a business owner of a limited company, it’s crucial to remember your venture operates as a separate entity, distinct from you and your personal finances. And you need to maintain this clear distinction in practice to ensure you clearly understand your company’s financial position.

By holding separate accounts for your personal and business assets, for example, you can accurately track sales, expenses and profits related solely to your business operations. This clarity can help you make well-informed business decisions, create realistic budgets and set achievable business and personal financial goals.

Differentiating between personal and business finances can also provide owners of limited companies some legal protection by potentially safeguarding your personal assets from possible business liabilities and legal disputes. It’s not a nice thought, but the time may come when your venture faces legal issues or needs to be dissolved. In these situations it’s important your personal assets are distinct from your business assets so you can hopefully recover relatively quickly. This is a complex area and we believe the arrangement of personal and business finances should be done with the support of an accountant.

One key reason many business owners split personal from business assets is to benefit from company-related tax deductions, such as writing off business expenses. Businesses can benefit from many potential tax write-offs and a financial adviser can help steer you towards those best suited to your venture.

Retirement planning

As an entrepreneur you may enjoy greater flexibility than an employee over your career pathway, but you lack the benefit of employer-supported retirement schemes. I believe you should avoid relying on your business for part of your retirement plan and instead focus on funding your pension, which you’ll have to set up yourself.

Once again, you should separate your personal retirement savings from your business finances. To save for retirement, you could consider tax-efficient schemes such as self-invested personal pensions (SIPPs). SIPPs offer tax benefits that can significantly boost your savings over time. Getting into the routine of regularly contributing to these schemes and reviewing them to ensure they continue to match your long-term goals could help secure a comfortable retirement. Even so, the benefits of your SIPP could fall below the amounts paid in.

Financial advisers can also provide wider guidance on tax strategies, investment options and other retirement planning solutions tailored to your specific needs. These can help ensure you make the most of tax-efficient opportunities available to you, including ISAs as well as SIPPs. Married couples and civil partners could also consider making use of spouse’s tax allowances to increase their overall tax efficiency.

To be a successful entrepreneur you need to plan ahead in many aspects of your business and personal life, including your personal finances. An entrepreneur’s personal financial plan involves additional bespoke considerations to the ones mentioned here, but these make a good starting point.

If you’re unsure about what to include in your financial plan, you may benefit from speaking with a financial adviser. At Schroders Personal Wealth we often advise business owners. So if you’re an entrepreneur, we can assess your unique challenges and opportunities and help create a financial plan to meet your requirements. Please don’t hesitate to get in touch.