Why advice is key to running your business

Another important factor is financial advice, according to IFA James Corcoran, who says it can help entrepreneurs navigate their company’s life cycle with success.

The chartered financial planner at Lumin Wealth says that most small business owners experience four stages in their firm’s life cycle. This includes building wealth, extracting wealth, planning for retirement, and exiting the business. 

And he insists that good financial planning can help set up entrepreneurs for success during each stage.  

He says: “Most business owners work with an accountant, many will work with a solicitor, however shockingly few work with a financial planner.

"This is a major issue as financial planners bring a comprehensive skill set and perspective that uniquely positions them to assist small business owners in achieving financial success, over and above the tax planning skills of an accountant.

"Financial planners possess a broad understanding of various financial areas, to help business owners inside and outside the business. These include investment management, tax planning, risk management, and retirement planning. This holistic approach ensures that all aspects of a business owner's financial situation are considered."

Extracting business wealth

Corcoran recently raised this issue in the summer edition of his firm’s newsletter, where he notes that during the accumulation stage, cash flow modelling can provide a clear view of a business’s future cash flow, enabling the owner to easily visualise the growth plan for their firm and the eventual exit strategy, which may be sale or retirement. 

He says this can also highlight other areas of opportunity, such as tax efficiency and optimising retirement assets including pensions or Isas.

He notes once a business is generating substantial cash profits, it is important to extract profits in a tax-efficient manner. 

Many directors take a small salary and draw the rest via dividends. However, Corcoran insists that pension contributions can be an alternative strategy because dividend tax rates are currently high.

A generous £60,000 annual allowance means large amounts can be paid into a pension in each tax year. Those with unused annual allowances from the previous three tax years may be able to contribute a larger sum. 

Expecting them to fully understand the intricacies of how to extract profit and to then go on and take advantage of all these benefits is possibly unrealistic.

Seb Ridout, First Wealth

This is echoed by James Batchelor, chartered financial planner at Progeny, who said pension contributions are an effective way to remunerate directors, as any employer pension contributions are classed as a business expense and therefore reduce the corporation tax liability of the company. 

He adds: “This enables the company to quite legitimately provide benefits to the director, without the burden of either income tax or national insurance contributions on that benefit.