The 5 most common financial mistakes for business owners

Business ownership can be fraught with all kinds of mistakes, from sending an invoice to the wrong customer, to targeting the wrong market. In truth, it’s almost impossible to run your business without making a single error.

However, your business finances are one area where cutting out mistakes can save you money and give your business a greater chance of longevity. As a financial planner in Bath, I often see the same mistakes plaguing business owners, costing them both money and time that would be better spent focusing on their customers.

Here are the five most common financial mistakes I encounter when advising entrepreneurs.

1.      Having inadequate business protection

Often, business owners don’t think about what could go wrong until it’s already happened. By then, it can be too late to remedy the issue without putting the business at risk.

Consider what would happen if one of the following were to happen:

• You become ill while running your business.

• An essential employee in your business becomes unable to fulfil their role.

• A shareholder wants to leave the business, or even dies, without confirming what they want to happen to their share.

Scenarios like these can develop quickly and cost you time and money, especially if you haven’t got any form of protection to safeguard the business.

It may be worth considering products such as business loan protection, critical illness cover, shareholder protection, or key person insurance, to protect the business from sudden changes.

Research from Legal & General shows that “if a key person died or become critically ill, four out of ten businesses would cease trading within a year.” That’s why it can pay to consider protection options before you need them.

2.      Not making pension contributions through the business

One common mistake I see business owners make is not paying their pension contributions from company income.

You can make pension contributions from pre-taxed company income as an allowable business expense, meaning it doesn’t attract Corporation Tax. In real terms, this would mean a £123.45 pension contribution would only cost your business £100, when factoring in the 19% reduction in Corporation Tax. Your savings will be even greater once the Corporation Tax rises to 25% in 2023.

Pension contributions are also exempt from National Insurance, so you could save a further 13.8% compared to taking money from the business as a salary. Combined with the current rate of Corporation Tax, that’s a 32.8% saving.

If you would like more information on how pension contributions could help your business, please contact us.

Pensions are not normally accessible until aged 55, rising to 57 in 2028.

Pensions are also a form of investment and can fluctuate in value. Therefore, they are not risk free. The value of tax benefits described depend on your individual circumstances. Tax rules can change.

3.      Not setting aside money for emergencies

No matter how well you plan, there’s no real way to prepare for unforeseen emergencies other than having a dedicated emergency fund.

Even if you have comprehensive business protection, the coronavirus pandemic has shown the importance of having money set aside for unexpected events.

It’s important to have an emergency fund somewhere safe that you aren’t tempted to access for normal business use. Keeping some cash aside to cover costs and expenses in an emergency could be the difference between staying in business and having to close.

4.      Keeping large amounts of business cash in a low-interest savings account

Are you keeping too much of your business cash in savings?

Over time, the effects of inflation mean your cash could slowly lose value in real terms, especially if it’s in a savings account paying a low interest rate. At this point, it may be worth considering some investment options for surplus cash.

You may need to take a longer-term view, and consider investments that align with your risk profile, if you want to maximise the returns you generate. We can help you make the most of your business’s cash holdings.

Remember that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Cash offers capital security, which will be lost if investing in equities.

5.      Not consulting a financial professional

The biggest business owner mistake you can make is not asking for help from a professional. At Wiltshire Wealth, we can help you develop a plan specifically for you and your business, and make sure that you avoid the common pitfalls that business owners make with their finances.

I specialise in providing financial planning advice for business owner clients. If you’re a business owner in Bath and would like to discuss how I can help you, please get in touch.  Email daniel@wiltshirewealth.com or call 01225 699790.

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information purposes only and does not constitute advice.