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Your finances after... starting a business
If you're planning on going it alone, you need to make sure your personal finances are in order and remain a priority.
by Michelle McGagh on Sep 21, 2012 at 05:01
The credit crunch has seen many people lose their jobs, but it has also meant the UK has its highest-ever number of self-employed people. If you want to start up on your own, getting your household finances in order is just as important as making sure your business is financially healthy.
By spring 2010, self-employment was higher than at the start of the recession, and by autumn 2011 the number of self-employed people had reached a record level of 4.1 million, or 14.2% of employment, according to the Chartered Institute of Personnel and Development.
With more people setting up on their own, Dhan Sharma, director of Kent-based independent financial advice firm Maze Wealth, said forward-planning and contingency funds are a must. He recommends putting in place a contingency fund of between six and 12 months' net expenditure requirements, and said planning must be stress tested.
‘Before you do anything at all, early planning is essential. Ensure you create a comprehensive cash-flow model for both the business and your personal finances. The cash-flow forecast should not only show the current year’s forecast, but include a medium- and long-term scenario.’
Sharma said the majority of new businesses fail within two years, mainly due to cash-flow issues, and that business-owners were often overoptimistic about the immediate success they will have.
‘This optimism will potentially create a drag on your cash flow, and place both your business and personal planning in a precarious position,’ Sharma said.
He said would-be business owners should ask themselves the following questions:
- How long will it take to make the business profitable?
- How much income will I need to draw from the business to manage personal finances?
- What is the best way to structure my income to minimise the tax burden?
- What are my personal planning goals over the next three to five years?
- What are the risks affecting my planning?
Sharma said he was unprepared for some of the hurdles he came up against when starting his business. Part of the reason for this was having a third child just months after starting the firm, which he joked ‘was not in the cash-flow’.
He recommended factoring in luxuries such as holidays into the cash-flow, and having plans in place for who would manage the business if you are on holiday; how the business would affect your family; how the economy would hold up if the economic climate changed; and what would happen if the breadwinner is ill, injured or dies.
On a personal financial planning note, Sharma said a prospective business owner should look at how starting a company affects the family’s financial goals over the medium term, and whether any assets are affected.
When working for someone else, you receive the benefits of a pension and other perks which you will now need to provide yourself.
‘Running a small business can be a far cry from the benefits provided from a large employer such as "gold plated" pension schemes. In fact, there is not usually a pension scheme or private health plan for a number of years whilst the business is getting off the ground,’ Sharma said. ‘This may have to be factored into your personal planning in the early years, which places a greater emphasis on the contingency fund.’
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