Small-business owners must not overlook the importance of a personal wealth ‘Plan B’.
Every aspiring entrepreneur holds a gleaming image of success, painted with vibrant strokes of independence, financial prosperity and personal fulfillment. But within the ever-changing landscape of business, there lies an often-overlooked chasm between entrepreneurial dreams and reality. A mere slip can lead to freefall, not only affecting the business but also impacting personal wealth.
In the world of small businesses, where failure rates are high and the potential sale of the business is no sure bet, the subject of personal wealth management takes on a critical urgency. Many small-business owners pour their lives into their ventures, often overlooking essential financial strategies that safeguard their personal wealth. The illusion that business success will automatically translate to personal financial success can be a perilous misconception, leading to missed opportunities.
Small-business owners need a well-considered Plan B for their personal wealth, emphasising not only the creation of a financial safety net, but also the necessity of educating themselves in the intricacies of managing and growing that wealth.
“Many small-business owners pour their lives into their ventures, often overlooking essential financial strategies that safeguard their personal wealth.”
The entrepreneurial dream is not complete without a financially secure future, and the path to that future must be mapped with knowledge, foresight and prudence.
Risks to personal wealth from small-business ownership
ABS data shows that there are more than 2.3 million small businesses in Australia. An estimated 20 per cent of new small businesses will fail in their first year, and up to 60 per cent of start-up businesses will not survive beyond five years of launching.
Moreover, despite the blood, sweat and tears invested in building a business, not every venture is saleable. There is information to suggest that in Australia, less than four per cent of businesses sell. So, if business owners neglect things like superannuation and proactive wealth building in the hopes of a big payout come sale day, they might have to think again.
Sadly, many business owners realise this only when it’s too late to change their personal wealth circumstances. It’s like dreaming of winning the lottery, only to find out your ticket is from last week’s draw.
Imagine investing years into nurturing your business, sacrificing vacations and delaying gratifications, only to discover your golden goose isn’t as golden as you thought.
This sobering reality underscores the importance of a Plan B. A well-crafted, foolproof plan that ensures your personal wealth isn’t left at the mercy of business winds. It’s about recognising the vulnerability of your enterprise and taking measures to cushion your personal wealth from the aftershock of potential business setbacks.
But there’s another often-overlooked factor that plays a pivotal role in securing your financial future: financial literacy.
Sure, most business owners can navigate their way through their P&Ls, but without understanding how to manage and grow personal wealth, even the best-laid plans can go awry. Unfortunately, too many small-business owners, while experts in their business domain, are novices when it comes to personal finance.
That’s the outcome of us not having any financial literacy education while at school. Unless you were fortunate to have parents or other people in your life who could teach you about managing and growing your money, you have had to learn as you go. And you’re busy building your business, right?
Common missteps by small-business owners
Let’s address the commonly overlooked wealth strategies that could make or break a small-business owner’s future.
Superannuation contributions:
A surprising number of small-business owners fail to make consistent contributions to their superannuation funds, either out of oversight or a misguided belief that their business success (and subsequent sale) will adequately cover their golden years.
This approach is like running a marathon with a shoelace untied – it might not trip you up immediately, but it could lead to a spectacular fall later.
Investing in your superannuation fund is like planting a tree; it may seem insignificant at first, but over time it grows, providing shade and fruit. Not making regular superannuation payments reflects a short-term view that can lead to long-term financial instability.
The power of time:
In the same vein, small-business owners often overlook the power of time and the magic of compounding returns. Albert Einstein said, “Compound interest is the eighth wonder of the world.” Money needs time to grow, and by delaying investments, business owners are not just leaving money on the table, they are practically giving it away. Understanding and using the power of compound interest requires patience and wisdom, qualities that are vital, not only in business but in personal financial management.
The risk of discretionary spending:
Many small-business owners, engrossed in their business pursuits, often overlook the flow of personal expenditures, leading to a trickle that can become a flood. It’s essential to recognise that not all spending leads to growth, and frivolous expenditure can eat away at the core of financial stability. The neglect of a structured financial plan, incorporating both business and personal spending, can be a silent destroyer of wealth. It’s akin to a slow leak in a ship; unnoticed, it can eventually sink the entire vessel.
These missteps remind us that business success and personal financial security are not automatically intertwined. They require careful planning, a clear understanding of financial principles, and the wisdom to recognise and avoid pitfalls. Like a well-navigated journey, the path to financial success requires a map, a compass,and the wisdom to use them effectively.
Balancing business goals with personal wealth management
This is akin to a trapeze act. On one hand, you’re striving for your business to flourish, while on the other, you must ensure your personal finances are not left neglected on the sidelines. It’s about running a successful business and simultaneously securing your financial future. You can’t win a soccer game merely by defending your goal; you must also make offensive moves to score goals.
One crucial offensive move is diversification. Placing all your eggs in one business basket is a risky venture. Instead, spread your wings and invest in different asset classes, recognising that your business is just one investment. It is crucial that you put some of the income you are paying yourself from your business to work for you.
This strategy ensures that even if your business faces turbulence, your personal wealth remains secure and continues to grow.
Conclusion
As a small-business owner, you are the captain of your ship in the unpredictable seas of entrepreneurship. While sailing towards the horizon of business success, ensure you have a sturdy lifeboat for your personal wealth. Never let your personal financial future sink with your business.
It’s time to invest in a financial education, and it can be as easy as picking up that personal finance book gathering dust on your shelf. It’s time to realise that while you might be a business owner, you’re also an individual with retirement needs and financial aspirations for you and your family, independent of your business.
Plan A may be your business, but a solid Plan B ensures you’re financially secure. It’s not just about having a backup plan, it’s about creating a future-proof strategy that guarantees financial freedom and peace of mind.
After all, the ultimate aim of the entrepreneurial dream is not just to succeed in business, but also to secure a comfortable and worry-free future.
This article first appeared in issue 42of the Inside Small Business quarterly magazine
