Five key strategies for financial success: a guide on how to create wealth as a business owner

People go into business or become business owners for many various reasons, the most prominent being the creation of wealth, financial independence and financial security. Ricardo Teixeira, Director at BDO Wealth Advisers shares five key success strategies business owners should be putting in place to create wealth. 

         1. Know the numbers

To be in control of your business, and in turn your wealth, it is crucial to have reliable and up-to-date financial information that allows you to make informed decisions, both for the business and your family.

Knowing your numbers means get to grips with the meaningful yet simple metrics like revenue per employee, preparing annual financial statements and keep your Tax up to date for example. Successful financial management needs someone to be dedicated to do this. If you can’t afford a Financial Director for the business, hire in a FD on a part time basis, you may just need a good FD for 5 hours a week to keep you on track with the numbers and the financial strategy.

Financial management also extends to your personal balance sheet – keep this up to date, what you own and owe , categorise your assets, keep your personal taxes up to date, and most importantly as a business owner, get a valuation done on your business. You don’t have to be a seller to have a valuation of your business. A valuation of your business will help you identify opportunities to improve and enhance business operations so that you can optimise the value of the business, and it will help you plan and think about your exit strategy.

         2. Have a plan to exit

Every business owner exits at some point in time, whether it be selling the business, your retirement from the business, the event of disability or even your death. Planning for succession is the single biggest challenge that plagues all business owners.

The starting point begins with knowing that succession is about the transfer of ownership as much as it as about transfer of management.

• Transfer of ownership

Start with a will and last testament – this will get you thinking about who inherits the business, or should it be sold, is there a buyer and what is it worth. Then tackle the shareholders agreement – have the conversation with your shareholders, or if you already have a shareholders agreement, revisit it and test that it is still appropriate. Does the agreement deal with death, disability, long term illness, emigration and retirement? Ownership is about having a buyer or successor – who will this be? Have you spoken to them about your plans? Are they willing to take over the shares? How will the sale and transfer of ownership be funded? These are just some of the crucial considerations that must be dealt with right away as you set up your documents.

• Transfer of management

This is about the operating capability that the business needs to stay in business. Operating capability starts with having governance structures that define how decisions are made in the business. Is there a board of directors? What is the level of authority at each level of management? It is important to ensure your business operating procedures are documented and that someone with the proper capabilities can take over immediately. Questions to consider are: Have you groomed your management successor to take over from you? Do you have depth in your management team that will allow the business to continue without you? Would a management buyout be an option for succession?

All of the above may seem overwhelming, but remember, it’s not a one day game. Having a financial guide or advisor on your side will keep you on track and moving forward with a plan.

         3. Get the investment balance right

The business alone should not represent your entire wealth. The goal is to have a wealth balance sheet that is made up of more than just your business but rather of both actively managed assets (like your business) and passive investments (like unit trusts, share portfolios, retirements annuities etc.) that don’t need you to be actively involved with to create wealth which serves as a passive investment.

We also often see how business owners place a heavy reliance on the business being their retirement capital. This is not correct. A business asset creates income (profits) and from that you get to choose how you direct the income – either back into the business to grow the value, or to fund your lifestyle (which is an expense and has no long term value) or to a portfolio of lifetime assets.

Lifetime assets are the passive investments that you will only draw on when the business runs out of money, or you’ve sold it and there is no longer the flow of income from the business. Lifetime assets will be the capital that you draw on to fund your lifestyle when you stop working.

True wealth is the combination of business assets and lifetime assets that have been balanced correctly to provide you with enough money to live comfortably throughout your life.

         4. Insure your income producing assets

As a business owner, without you the business will struggle and your sole source of wealth creation will disappear. Insuring yourself gives you certainty that you can plan for in the event that you can’t work. Yet, many business owners can often overlook this as they focus on insuring the properties they own, or the business assets likely machinery, stock and cars for theft or damage through fire and the like.

Consult with a Certified Financial Planner® who will assess the capital shortfall in the event of dread diseases, disability and death. Doing a financial needs analysis is essentially calculating the gap between the assets and investments you have that are liquid and the total capital that you will need to fund your income and liquidity when you can’t work. Essentially this strategy is the most simple -  take advice on the insurance you need to cover any shortfall that your balance sheet won’t cover at any point in time.

         5. Know your purpose

True wealth is not just financial, it is also about living the life you want to live with levels of satisfaction and fulfillment across all the elements that make up your life. This is why it’s so important to fully know your purpose, your values, what is important to you. Then you can direct your time and money to these values and get the balance right. At BDO for example, we use the wheel of balance to challenge our clients to think about what’s important to them. Through using this kind of framework we can help our clients direct their money and time to what will bring them the greatest joy and meaning in their lives.

These five strategies for financial success offer a practical game plan to guide business owners in creating long term wealth. They are not complicated, but they do need action. Work with a financial guide, a trusted advisor, who will help you keep on track and get into action. Find a professional to rely on to put the strategies into place so that you can focus on what’s important – confidently creating wealth as a business owner.