The Big Picture Process of Financial Planning for Business Owners

Whether you already own a business or are deciding to do so, everyone requires a secure financial plan that will act as its backbone. Before delving deep into the details of your business, we must first see the big picture. First of all, business owners have two entities – individual entity and the business entity.

It is vital to adjust the needs of your developing business with your capacity to meet your own commitments. With enough time on your hand and professional consultants from relevant fields, you and your family will easily be able to create a sound financial plan.

However, what if there are other partners not from your own immediate family – then it gets a little bit more complicated. Too many partners often cause conflict of interest for instance, when equity investors are involved. Nonetheless, if all partners come to a mutual understanding and have nothing but the company’s best interest at heart, then it shouldn’t be a cause for concern.

Tax Planning

Before all else, choosing the legal structure of your plan should be top priority, since it will determine how your profits will be taxed. Now in Malaysia there are 4 main types of business entities: Sole Proprietorship, Partnership, Limited Liability Partnership and Sendirian Berhad (Private Limited).

• Sole Proprietorship: Having unlimited liability may not seem like the best option however it does come with its perks. For instance, there is less paperwork and formalities while cost of entity formation relatively inexpensive and is not needed by the Malaysian government to be audited. Moreover, your business income is dealt with the same as your own salary, making tax compliance significantly more straightforward.
• Partnerships: According to the Companies Commission of Malaysia the partnership must include at least a minimum of 2 and a maximum of 20 members. Sendirian Berhad (Sdn bhd): While Berhad is a public limited company, Sendirian Berhad is Private. Sdn Bhd can be either limited by shares (most common) or by guarantee (more common for non-profit organizations). In the former case, should the organization gets to be bankrupt or goes into liquidation, individuals are not committed to pay off the debt.
• Limited Liability Partnership (LLP): After a hiatus of almost a decade, LLP has only recently started to make its mark. The partners in an LLP enjoy limited liability and choose a decentralized management structure unlike general partnerships, When your business profit is over a certain threshold, having an LLP or Sendirian Berhad will give better tax savings because the first RM500,000 profit is taxed at a flat rate of 20%, relatively lower than the high income earners’ personal income tax rate.

Investment Planning

Most SMEs are self-financed by their proprietors, which brings about the business turning into the proprietor’s one and only investment. Even when he has additional funding to make different ventures, he injects cash to his business, where he feels he has the most control over his profits.

In most cases, the owners fail to diversify investment risks. By understanding how capital is used in his business, resources should be employed to spread out the danger that comes with his business. Moreover, business owners often make the mistake of neglecting the importance of assets outside of their business. If you reinvest everything, there might be liquidity issues. There must always be a balance of personal assets and not only your business assets.

Retirement Planning

As mentioned above, you must refrain from reinvesting all of your profits and count on that ‘big score’ for your retirement plan. Alternatively, you may see the business as a wellspring of capital that will finance your retirement needs. Such a way of thinking may lead to catastrophe later in life, when you retire and require other means of fulfilling your financial needs.

You might believe that you’ll never part ways with your beloved business. However, do not end up as the employer whose employee retires before him. In the meantime, you can add to your EPF contribution and you’d be surprised how much of a difference it can really do! Because you can contribute up to 19% as employer to your own EPF account and the contribution is tax free.

Succession Planning

If one day if your business grows to be a valuable asset, and you are finally ready to hand over the mantle, don’t think a simple ‘Will’ or Trust will suffice. To guarantee business congruity after your departure, your entire estate planning may need to be revised.

Business succession plan includes the succession agreement, especially if there are other parties involved, not including your family. This is to ensure your business runs without a hitch. Funding the purchase of the shares being transferred is another issues that need to be arranged before it actually happens.

Risk Management

From the moment you own a business, unfortunately the risks multiply. Most of them are out of your control such as natural disasters, sudden death or disability of a key employee, loss of business assets, lawsuits arising from negligence or defective goods etc. A sound financial plan must therefore include a failsafe for such instances so it doesn’t completely cripple the business overnight.

Although some may be remedied by your trade’s own legal structure, however others may require more focused insurance coverages. Just keep in mind that the amount might come up to beyond your reserve and in some cases, you may have to compensate your employees as well.

The most important fact to remember is to do what you do best: that is ‘Doing business’!
Financial planning requires years of experience and not to mention, several fields of interrelated study.
Thus, the ‘DIY’ approach may not be beneficial for you in this case. Be smart. Seek professional help.

A quality of a good leader is not to take all the responsibility but also to delegate the task to someone more efficient. It can make the difference between winning or losing your business.

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