Savvy Business Owners Plan for Success…ion–Set Financial Goals 2
Creating an effective and efficient business succession plan must meet or exceed the goals of the current business owner. One of the most important pieces in succession planning is to clearly identify financial goals (future annual income needed for owner, staff, shareholders).
Early on in our business life cycle we have paid ourselves some sort of reward for taking the risk of starting a company. Depending on our business structure either a salary/bonus, dividends, or a shareholders loan has been used to help fund financial goals (emergency savings, supporting quality of life, retirement). Each of these methods of payment has provided advantages and disadvantages that accountants have generally provided guidance as to maximize their benefits.
As we progressed though the stages of our business (start up, growth, and maturity) we moved from paying ourselves basic living expenses in the start up phase to moving towards funding other financial goals with retained earnings, as our company grows and matures. Proper financial planning will help identify efficient tools and strategies requiring a steady withdrawal or movement of corporate compensation (takes time to build pot of money to replace income level drawn)
There are two main reasons why it was and continues to be important to monetarily reward ourselves for our business efforts. First, the salary or dividend we are paid should be used to fund other financial goals outside of building our business. Diversifying investments plays a key role in reducing risk in order to reach long range financial goals. The second reason why it is important to routinely receive compensation from our business is because future buyers will also want to earn a living when they pick up where we left off. New owners don’t want to have to recreate a business just to pay their expenses.
To find the cash used to pay ourselves successful business owners have altered the revenue equation of R – e = profit to R – p = e. Often the difficult part in transitioning the business is the dependency we have developed on the regular business cash flow we receive. We develop this dependency because we have not built the replacement income stream required to offset our accustomed quality of life.
Begin transitioning your business today by first clearly understanding the financial goals you are trying to reach. By doing so transitioning your business will be much easier.