Financial planning 101: for when you’re starting out in business

Setting up a new business is an exciting and exhilarating time, you have lots of ideas, bundles of energy and ambitious plans to grow.

In the early days of a business, financial planning may appear to be well down the list of “things I’d like to do”. But it's important to ensure you have the right plans in place to protect your company as it grows.

These plans should span the spectrum from ensuring the business is protected in the event of you not being around (through death or illness), right through to how you invest your money when you are a roaring success and (maybe) sell up!

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Not only is it important for building a strong and successful business, it's also important to do so as others expect you to plan responsibly.

No one sets up a new business to lose money. Nevertheless, rather than just focus on your profit and loss accounts, you should be considering others who are financially invested in your business.

These stakeholders might be:

• your investors (shareholders), who've provided your all-important financial backing or
• other forms of lender, who help you to finance your plans
• fellow directors or partners who have a major stake in your future success
• your staff, who expect to be paid and have staked their career choices on you - some of them may even hold share options in your business
• not to forget you and your family, as you may well have had to make significant financial sacrifices to start your own business.

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The 3 magic questions

Our financial planning experts, Redbourne, ask their clients 3 important questions when they're starting out in business:

1. How will your business continue to operate and be successful if you, or a fellow director/partner, is not around due to death, or serious illness?

2. If you die or fall ill, how will you ensure your family are treated fairly and receive the fair rewards for your effort in setting up the business?

3. In that same scenario, how will the shareholders in your business realise the full value of their investment?

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Prove your answers

If you're one of the few that can actually answer all those questions with confidence, then they'd ask you

“where is this all written down and agreed?”.

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You're most vulnerable when you start - but the fix is easy

It's during this early stage growth period, when the income and profit may not yet be flowing through, that you are at your most vulnerable.

But there are some very simple steps you can take to tackle these issues successfully.

You'll need to tackle them in relation to 3 key groups.

Many of today's business owners have previously had higher paid, secure employment, with additional benefits such as pension, death in service and long term illness cover.

Giving this up is costly and may leave your family vulnerable. Often, you will have made a significant investment into your new business to get it going, but that investment activity can have little value to your family in those early days. You need to consider ensuring they are protected from outset.

Realistically, it may not be possible to replace these benefits in full from day 1 of your own business venture. These are often the first 'easy' sacrifices that founders and newbie freelancers make.

However, the good news is that you may be able to replace some of these benefits through the business, so that if anything were to happen to you, then your family could receive a lump sum payment to help secure their future.

While the measures that follow will not fit all new business owners, and personal circumstances will inevitably direct the options that you have, knowing these possibilities are available, will help you at least ask the right questions of a good financial adviser and/or insurance broker.

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Financial planning solutions to protect your family

Existing insurances

A number of your existing insurance policies may be adequate to cover any financial shortfalls, if you're unable to continue running your business.

So, you may already be covered for events that could put the financial security at risk.

When you're looking at insurance policies, make sure you identify what cover you need and cross-check whether you already have that covered somewhere else.

No point in paying twice.

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Existing pensions and investments

If you have these already, again, cross-check their coverage and the terms or conditions attached to them.

(Check your shareholder agreement in relation to investments as this will usually cover what happens on death or if you suffer an incapacitating illness. )

Pensions especially can have valuable death benefits within their terms and so you should make sure you can evaluate their worth as your pension grows, and understand what that means for any family financial risks that you starting your own business may present.

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Directors' arrangements

Directors and company owners are able to benefit from a number of specialist arrangements that enable their company to fund life insurance cover, which is ultimately beneficial to that owner/director's entire family.

Unlike many other benefits, these ones will often not attract a tax liability - in fact, they can be highly tax efficient and kind to cash-flow. Make sure you ask a good financial adviser about them.

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