If you run a small business, or if you are thinking about doing so, then that business needs to be the foundation of all of your financial planning. After all, get the business right and you make all the other parts of your financial plan – your investing, your debt management, your super, your insurances – much more likely to succeed. This article gives you a little illustration of the powerful impact that effective business planning can have.
This week, we want to talk to you about what may turn out to be the most significant investment you could ever make. It is your own business.
You may be surprised to hear that most financial planners are actually prevented from advising clients about their own business. Their licencee (the person under whose authority they provide advice) will not let them do so. Licencees typically insist that the advice be limited to managed funds, direct shares and maybe some limited forms of direct property.
All of these investments have their place, but they are not the main game when it comes to maximising wealth. For business-owning clients, the main game is just that: their business. After all, it is the business that creates the cash for investment (and servicing debt if you want to borrow to invest).
Think about two fictitious clients: Brian and Jayashri. Let’s say that Brian and Jayashri both own businesses earning about $100,000 a year and they both have saved $100,000 which they are seeking to invest. Brian goes to see a ‘standard’ financial adviser who is only allowed to discuss managed investments. The adviser does a good job with this, and helps Brian identify an investment which makes him a 10% return each year (this is slightly higher than the long term average return for Australian shares of 8.7%. Source: ASX/Russell Long Term Investing Report 2016).
For this, Brian pays his adviser $2,000. As it relates to an investment, this fee is not tax deductible. Given his tax rate, Brian has to earn $3,174 in order to have $2,000 left to pay the tax bill. The before tax cost of the advice was, therefore, $3,174.
Jayashri saw a different adviser (Let’s say she saw us!). Given our experience, the first thing we did when we saw she owns her own business was discuss that business with her. We made a few suggestions, including changing her payment terms such that the number of days needed to collect payment is halved, purchasing a second company car for use by Jayashri’s teenage daughter and using a simple system of colour-coded credit cards to automatically allocate business and private expenses, which reduces book-keeping and accounting fees.
Altogether, these suggestions increase the business profit by $10,000 a year. Every year.
Once that was done, we also looked at the $100,000 she had to invest and made the same recommendation that Brian’s adviser did. So, Jayashri achieved the same return of $10,000 on her investment. Add this to the guaranteed $10,000 a year of increased revenue, and her overall return becomes $20,000.
The charge for Jayashri was $3,000. This is more than Brian, but because the bulk of the time spent on her case was business advice, which is tax deductible, she also only had to earn $3,174 in order to pay her fee.
So, you can see what has happened here. Brian and Jayashri’s advice cost exactly the same in terms of pre-tax dollars (which means they worked just as hard as each other to buy the advice). They both received good advice. But Brian’s advice was limited, and specifically ignored his business. Jayashri’s advice made the business the focus. If nothing else, that made the advice tax deductible.
If you own a business, then that business is the main game in terms of your financial profile. Good business advice is probably the most important advice of all. So please get in touch and let us discuss how you can make your good business even better.
The tax advice component of this article was prepared by Dover Financial Advisers, a registered tax (financial) adviser.