“Money makes more money. And the money that makes money makes more money.” – Benjamin Franklin. This quote reflects the mindset of business owners. They believe in putting their money to work to make more money. They would invest their money in traditional and alternative investments, acquire new businesses, and expand current business operations to make more money, and hence wealth management for business owners becomes essential.
Financial planning for business owners is quite different from financial planning for individual investors as business owners would want to maximize the utilization of their business resources for wealth generation and creating a legacy. In this blog, we will discuss the process of wealth management for business owners.
What is Wealth Management?
Wealth management is a holistic approach that helps to manage your assets carefully as per your financial goals. This includes following steps
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Assessing your financial goals
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Defining goals as per your financial situation
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Understanding your risk tolerance
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Creating an investment portfolio
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Review and rebalance the portfolio
These steps are important when we plan wealth management for individuals. However, when planning for business owners it requires a holistic financial approach as it includes planning for business and personal finances.
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Wealth Management for Business Owners
In today’s competitive business era, it’s highly important to create a comprehensive strategic, and effective wealth management plan to enjoy long-term financial security and have a stable business. Wealth management for business owners not only includes planning personal finances but also planning of growing, protecting, and optimizing the business resources. Effective wealth management helps in stable business growth, manages risks, and builds a strong financial foundation for the business.
Let us understand the steps involved in wealth management specifically for business owners.
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Distinction Between Personal and Business Finances
It’s essential to create a clear boundary between your personal and business finances. There might be circumstances wherein you withdraw business money for personal needs but often using business money for personal needs will lead to poor financial decisions. Following are 2 ways to avoid such situations.
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Separate business and personal accounts: You must maintain separate accounts for business and personal purposes. All the transactions related to your business must be done using the business account.
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Business compensation: The business and business owner are 2 different entities and the owner gets a salary from the business to run it. Hence, decide on a salary from your business that gets credited to your account for your finances.
Design a Business Financial Plan
A business financial plan acts as a roadmap for designing financial goals, investment strategies, and cash flow management. There might be differences in your current business stage and your future business goals and to achieve these goals you will need to take action steps like business expansion, entering a new market, or acquisition of other smaller companies. You need finance to decide which action step would be the best to achieve your business goal. You might consider acquiring small businesses or expanding your business operations in a new region.
All these action steps need finance and hence a business financial plan will guide you to take appropriate steps as per your business’s financial capacity.
Optimize Tax Planning
Business owners have to pay hefty taxes on their business which in turn impacts the profitability of the business. Hence, businesses require effective tax planning to benefit from various tax deductions and minimize tax liabilities.
Showing the operating costs, depreciation, and contributions in retirement accounts are some of the ways to reduce tax obligations and increase the profitability of the business. You can hire an adviser or tax planner to plan your taxes.
Risk Management
Businesses constantly face risks due to various internal and external factors. Internal factors such as leadership management, employee-management conflicts, company culture, company values and policies, innovation, and technology can be easily managed by providing proper training, conflict resolution, and channeling communication processes.
However, external factors can become big threats to businesses and if not handled properly can lead to shutdowns. These factors are market volatility, political factors, rapid technological advancement, business law, and so on. These factors have a major impact on businesses and have to be dealt with smartly. Hence, business owners transfer such risks to insurance companies to mitigate them.
Business owners invest in proper insurance policies as per the needs of their business. However, business insurance, insurance of the key person or owner, and disability insurance are non-negotiable policies to invest in.
Succession and Retirement Planning
After your business has achieved all the heights that you had dreamt of, you might want to take a back seat and take a little time for your family and yourself. Here, succession and retirement planning comes into action. A well-designed succession plan ensures stress-free retirement and a secured legacy.
You need to be very vigilant while identifying your successor who can take over your business. You need to make sure that the value system of your chosen successor and your business is aligned. You also need to do estate planning and settle your business assets before retirement.
Hire a Professional Advisor
As a business owner, you will be occupied with different aspects of your business and certain business continuity. Hence, it will not be possible for you to plan wealth management and handle business operations. In this situation, you can consider hiring a specialist or financial advisor who understands the complexity of wealth management and can create wealth management strategies on your behalf.
They are expert in providing advisory services and planning solutions including investment management and creating a plan tailored made as per your business and personal financial goals.
Roles of Financial Advisor
A financial advisor has to provide financial management services and perform various roles. These roles are as below
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Financial Planning: An advisor has to create customized plans and strategies that would be suitable for all investors to achieve their financial goals.
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Investment Management: Investment management involves preparing plans for investments based on the client’s risk tolerance, financial goals, and time horizons.
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Retirement Planning: This is the time to ensure that you have a stress-free retirement. The manager will help you plan your retirement. His recommendation might be to invest in accounts like 401(k), IRAs, and other such accounts.
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Tax Planning: Tax planning helps to create strategies to minimize the overall tax burden of the client. Business owners must follow these strategies to minimize tax liabilities and maximize their profit.
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Succession and Estate Planning: The advisor helps the business owner identify the right leader for the business and helps in the transfer of wealth in the most tax-efficient ways. He must create a will as per the owner’s wish to distribute wealth to his heirs to avoid conflict after the owner’s death. This step will also ensure that the wealth is distributed as per the owner’s wish.
Suggested read: Hiring personal financial manager
Conclusion
Wealth management for business owners is about creating the right balance between personal and business finances. An entrepreneur must understand the intricate relationship between personal wealth and business success to make informed decisions.
Steps like identifying business financial goals, risk management, investing in the right investment vehicles, estate planning, and so on help in aligning your business aspirations with personal goals.
Taking investment advice from an expert will help you to understand the challenges and opportunities that market ups & downs bring in and how they impact your portfolio. He will facilitate all the required information and steps to realign your portfolio with your objectives. You can review the past performance of the expert and understand how efficiently was he able to deliver the results to his client.
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