Wealth Preservation for Business Owners
There is no doubt that business owners are having a tough time now, and it is probably going to get worse as unemployment increases and people spend less. We have not yet seen the full impact of COVID-19 on our economy.
As business owners struggle for survival, they face the real danger of losing not only their business but also their personal wealth. For business owners nearing retirement, of which there are many, this is a potentially disastrous situation.
At any time, there are some key principles around managing the connection between business and personal finances, but at this particular time it is more important than ever that these principles be adhered to.
- Set a clear dividing line between business finances and personal finances.
- Don’t treat your business bank account as a personal slush fund
- Set drawings from your business at a constant, regular amount to create certainty for planning both your personal and your business finances.
- Don’t undermine your personal wealth by using savings or going into debt in order to save a business unless you have confidence that this is the best use of personal funds.
- Evaluate the investment of personal funds into your business in the same way that you would evaluate any other investment
While it’s OK to have money transferring between business and personal use, this needs to be done in a planned and measured way. If there is too much ‘give and take’ without measurement, everything becomes murky. There is no clarity around the true state of either business or personal finances. Reliance on heavy drawings from a business is tenable when the economy is going well, but can’t be sustained in a downturn. When a business is failing, an emotional connection to the business can lead to irrational decisions.
Liz Koh is an Authorised Financial Adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847. For free eBooks, go to www.moneymax.co.nz and www.moneymaxcoach.com