As I said in my blog Ignore Personal Development at Your Peril, it’s easy to forget to look after yourself when you’re starting a new business. In that blog, I talked about this in the context of training, but there are other aspects of looking after yourself too. One is physically, which I’ll discuss in a future blog, but in this post, I’d like to talk about looking after yourself financially.
When you start a new business, you put everything into building the business. You’ve worked really hard, probably too hard sometimes, and you tend to put the business and your team before yourself. I think it’s important to do that, but I also think there’s a point when that becomes more of a badge of honour than a necessity. At some point, you have to rein yourself in, which isn’t always easy. I was rubbish at it! As I said in my previous blog, I was happy to spend thousands on my team and give them time for personal improvement, but it took me six years to do the same for myself and that actually had a negative effect on the company.
Why look after yourself financially?
So, why is it important to look after yourself financially. One of the reasons I feel this is important is that if you look after yourself financially, it means your headspace is free to concentrate on running the business.
When you’re in a startup, the reality is that for the first couple of years that might be difficult because you’ve put everything you’ve got into the business. I get that and there’s nothing wrong with that. But again, don’t make it a badge of honour. There’s a tipping point at which your business can sustain itself and you can begin to think about looking after yourself financially.
When should you bring in an IFA?
The best thing I ever did was find a good independent financial advisor (IFA). I’ve maintained that relationship for around 17 years and this IFA has been with me through thick and thin, the good times and the bad. They’ve always been there to offer advice, even when there wasn’t money for me to put aside in savings, investments or pensions. I think it’s really important to say that, even when you start your business, having a financial advisor will help you.
In the first instance, they can make sure you don’t overstretch yourself personally. Like I said, if you’re having personal financial problems as well as dealing with business issues, that’s a real weight on your shoulders. If you have a financial advisor and an accountant, the three of you can work together to figure out what you can afford to put into the business and what you would be prepared to potentially lose if it doesn’t work out.
Equally, they can be ready for when things are going really well and you are in a position to put something to one side.
If you have a financial advisor in place when you start your business you can seek their advice as to how much you are able to put into the business yourself. You will also have someone there to question some of your decisions. You might have a really bad two or three months and decided to put £20,000 of wages on your credit card. Ultimately, that is your decision, but you need someone who can question you and be the sense of reason who says, ‘Hang on a second. Are you throwing good money after bad with this, or is this something you can do because you know the client who hasn’t paid you will be paying you in 30 days’ time so you don’t have to put the next set of wages on the credit card too?’ A financial advisor can make you stop and think about whether, in the worst-case scenario, you might have to fold the business with a load of personal debt as well as company debt. Your accountant is also important for questioning these decisions too.
Equally, as your business grows and things are going well, your financial advisor can be really important. At this stage, the conversation between your financial advisor, your accountant and yourself is about what the business can sustain so that you’re able to not just keep it ticking over but to grow it and fulfil your vision, while also making sure that you begin to reap some of the rewards of the risk and effort you put into building this business.
At this point, you might start thinking about putting some money aside in your pension, and using your full pension limit, as well as topping up your pension for the three years you haven’t been putting any money into it, for example. Or you might put some money in investment funds, or ISAs. The aim is to set money aside in a really tax-efficient way to make sure you’re looking after your future without bankrupting the company.
How an IFA helps when things are going well
When you reach the stage where your company is flying, you’re doing really well and you’re generating enough profit to put some back into the company to keep it growing, while still being able to take out, at this point, pretty decent sums for yourself, it’s important to think about how to do that in the best way.
At this stage you might have used up your ISA allowance and your pension allowance for the year, so what is the next best, tax-efficient way of saving your money and extracting it from the company? This is where an IFA can be very helpful.
In case anyone is wondering I use Foresight Wealth Strategists, https://foresight-ifp.co.uk/, whom I can highly recommend.
One point I’d like to make at this stage is that I’m sure you’ll be approached by people about sticking your money offshore, whether that’s personally or from the company’s point of view. This is just my opinion, but I believe you should never do that. You should pay the taxes that you morally have to pay in the country that you do business in and you shouldn’t try to hide profits, either personal or company, in offshore, havens. There are two reasons I believe this. The first is that it’s morally wrong, and the second is because it has a habit of coming back to bite you. I know several good people who were tempted to make poor decisions and HMRC caught up with them. They then not only owed a fairly sizable sum of money that had to be repaid but also a fine on top of that.
Finding the best solutions
Having a mix of an independent financial advisor, an accountant, a financial director and a tax advisor around the table if you reach the stage where people are interested in buying your company is also really important.
What I used to do was get everybody together in a room, explain the situation and then ask what the best way of dealing with it was. What you quickly realise is that there are many different ways of dealing with situations like that. Of course, you want to pay the least amount of tax you can, but you have to do it within the rules. Using the rules to your advantage I believe is fine, you should pay what tax you are due, but not pay more.
When you get your financial advisor in a room with your accountant, tax advisor and financial director, it’s amazing the discussions that happen and the debates they have. At the end of it, they will come out with something they’re all happy with and, nine times out of ten, that will be the most efficient way for you to extract your money.
This is particularly important during an acquisition. You need to make sure you are in the best possible place for a situation like that because the sums of money involved are big and you don’t want to make mistakes and do things in the wrong way that cost you maybe an extra 10% in tax. It can be easy to do things incorrectly if you don’t have that specialist advice. It’s not worth scrimping and saving on fees for people, because more often than not, IFAs and other professionals will save you far more than they charge.
How to choose a financial advisor
I’ve talked about IFAs, but you can of course also see a financial advisor who works for an organisation that sells its own financial products. Whether you choose an IFA or another kind of financial advisor is a personal preference.
Personally, I prefer to have an IFA, because they can go to the market and help me decide which are the best financial products and which companies I should invest my money with. I believe they have an unbiased view of the investment opportunities available, which is why working with an IFA is my preference. A financial advisor who works for an organisation that only has a limited number of products available isn’t able to give you the same choice. They might have great products, but they’re still limited, which is why I think it’s more advantageous to work with an IFA instead.
That’s not to say there aren’t very good financial advisors who work at big financial institutions and will do a great job of looking after your money, this is just my personal view.
When it comes to choosing an IFA, I would treat it like choosing any other supplier. You can look at their reviews online, or get personal recommendations if possible. Once you have a shortlist, you can go and see them and choose the one who you feel is the best fit for you. Of course, there’s a risk involved – hopefully, you’ll get it right the first time but if you don’t, I don’t think you should be afraid of moving and taking your investments with you, although the longer you leave it the more complicated that gets. I mentioned in a previous blog that we went through six or seven accountants at Cake before we found the accounting firm and specifically the accountant that we were really happy with.
It’s also worth remembering that the reality is when most entrepreneurs start out, they often don’t have a pot to piss in. That was certainly the case with me. But I think IFAs take a view on you and look at your potential, rather than how much money you might not have at that particular point. If they’re prepared to take a gamble on you and spend the time helping and advising you when they’re probably not going to get that much return from you initially, that’s a good sign.
They’re prepared to take a gamble on you just like you’re prepared to take a gamble on them. If you’ve done your research, looked at some reviews, asked for testimonials and maybe had a referral from somebody then I think you’ve probably done as much as you can to find an IFA who is the right fit.
I believe that having an IFA is incredibly important at every stage of being an entrepreneur and you should get one right from the outset. I didn’t have one to begin with, but a few years in I realised that I needed one. If you choose the right person, they’ll be with you through thick and thin, and I feel very lucky that I found somebody who really did help me with a lot of things over the years.