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Maintaining wealth, providing for retirement and a
comprehensive succession plan are the key elements of financial planning for
entrepreneurs.
Businessmen
and SME owners form an important target audience for advisors. Financial
planning is vital for these entrepreneurs, because they need a constant source
of income to keep their business up and running. Retirement planning for this
target segment is also a challenging and time-consuming task.
Why plan?
The
first question that many entrepreneurs ask is why plan if the business itself
is the biggest security. While the cash in hand and all other investments made
into the business may be the biggest financial shelter for a businessman, most
of this wealth will be difficult to unlock immediately. Further, the businessman’s
family should not solely depend on or remain tied to the progress of the
business.
Again,
the potential rate of return from investing in the business itself could be greater
than other investment choices available. However, saving outside the business
in different instruments or markets will mitigate the risk of channelizing all
funds into the business.
What
are the fundamental elements of a financial plan for businessmen?
Provide
a cushion, in case of death, for the family to fall back upon
The
objective being protection, putting in place sufficient life insurance cover is
extremely important. This will provide for an immediate source of liquidity in
case of any unfortunate eventuality. Ensure all personal liabilities such as
bank loans, mortgages and liabilities (such as personal guarantees and accrued
income-tax on assets that have appreciated in value) are adequately covered. You
should ensure that there is adequate income for surviving family members, so that
they can maintain their lifestyle. Life insurance can be used to pay any
liabilities & dividends can be used to generate income. Term plans should
be considered as they enable one to pick up a bigger insurance cover at a very
low premium.
Nurturing
savings
Businesses
are vulnerable to a multitude of risks. The savings plan can double as a back-up
for rough business conditions as well as a source of additional capital in the
long run in order to exploit business opportunities. The idea should be to
systematically transfer wealth from the business entity to the businessman’s personal
holdings. There are methods available for this transfer—salary, bonuses and
dividends. From the taxation angle, salary and bonus would be the more efficient
means as compared to dividends which suffer an additional tax in the form of
dividend distribution tax. So these cash-flows into the businessman’s
individual account can be allocated into asset classes such as equity, fixed
income securities etc.
What about retirement?
Creating
a retirement plan can be considerably more complex for small business owners
than for other people considering the multiple sources of income, tax considerations and succession issues when
building a retirement plan. One must consider both personal finances and
business finances—and how both can work together to help the businessman reach
retirement goals. It is important to take stock of potential sources of
retirement income. Good venues are government and other pension plan payments, insurance
and investments in real estate. Businessmen depend largely on their business to
fund a substantial portion of their retirement. Further, while planning for
retirement, it is vital to put in place a succession plan.
What is succession planning?
Business
succession planning should be a priority for every business owner. Sooner or
later, retirement is inevitable. But when a business is in question, retirement
does not merely come into effect as and when the owner decides to stop working. Obviously
even if the owner has enough money to retire comfortably, there are certain crucial
questions to be addressed: What happens to the business? How will ownership be
transferred? Will the business be taken over by the family or sold? It's
important to realize that management and ownership are not necessarily one and
the same. For instance, the owner may transfer the management of the business
to just one heir but give equal number of shares to the other children. Also, business
succession planning does not end with an estate plan, life insurance or a will
only.
Succession
planning answers these questions and enables an orderly and cost-efficient
transfer of the business to the next generation. Failure to plan for an orderly
business succession can result in monetary losses or even loss of the business
itself.. So it is up to the owner of the business to clearly indicate at an
early stage his intentions and the direction of the business. A succession plan
will help avoid wasting time and money on legal battles.
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