- Date : 14/03/2021
- Read: 5 mins
A small business owner has to separate personal and work life, and secure both financially in a well-planned manner.
A small business is run by a team with often one or two people at the helm. The owners are the heart and soul of the small business and much of the show is run by them. By giving their all to the business, they risk losing sight of their financial future and security. The owner of a small business can and should plan their post-retirement future, and run the business with retirement as one of their long-term goals.
Here are a few handy tips that can help small business owners retire from their business on their terms.
1. Remunerate yourself
Often with a small business, the owner and the business are practically the same. But this need not be so, at least from an accounting standpoint. Under the ‘separate business entity’ concept, you and your business should be considered as two different entities. Accordingly, your business should remunerate you for the efforts you put in to run it. It may seem like taking money out of one pocket and putting it in another, but remunerating yourself can change your perspective towards running a business. And having a regular income in your account is the starting point towards structured retirement planning.
Related: Here's what I did when I started my business
2. Don't hesitate to seek financial advice
Unless you are a financial consultant yourself, there is no reason why you shouldn’t see one for your business and personal financial planning. With professional advice, you will be able to streamline your finances and get your financial goals in sight. A financial adviser can also advise you on important investment decisions regarding retirement financial planning, maximising retirement benefits and guide you on the right approach that you would have otherwise not given priority to. The advisor can also help assess shortfalls in your health and life insurance plans to ensure the safety of your family’s financial future.
3. Plan your retirement goals
Setting out clear retirement goals will help you to get financially secured and build the retirement corpus of the right size, and also plan your exit strategy. You should set your retirement age, consider your remaining active years, your post-retirement plans, your post-retirement financial needs based on standard of living, identify alternative sources of income, monetary benefits from handing over your business after retirement, etc. With the size of the corpus figured out, you can focus all your efforts on building a retirement account in a more organised manner.
Related: Gold loans opens up opportunities for small business
4. Build a retirement fund
Apart from the tax benefits they offer, provident funds are also a standard retirement corpus for most salaried people. However, a small business owner has to diligently set aside a retirement fund through a bouquet of investment instruments. Investments like PPF, LIC policy, National Saving Scheme, and National Pension Scheme are some of the popular types of retirement planning tools that can not only build your retirement corpus but also give you a tax advantage. It is important to start early, even if it is a small amount. The benefit of compound interest can be best earned if the contributions to the plan is made for a longer duration. Apart from safe investments, you can also save and invest in mutual funds or direct equities for higher returns and lucrative retirement benefits. As you remunerate yourself from your small business, you can divert some of it towards the retirement corpus.
5. Protect your worth
If your business is continuously bleeding your business budget, maybe it is time for you to switch to a different business. But if it generates regular income and profit, the major goal for you would be the sustainability of the business. Many small businesses fold up despite good revenue due to a lack of financial foresight. Apart from reinvesting your initial cost of purchase, it is important to plough back a portion of your profit into the business. Another portion of the profits should be used to maintain liquidity. If there is a temporary lull in the market, this cash reserve will help you to meet your fixed costs and keep your business afloat. Another important way to protect your business is to build an emergency fund. This fund can help you meet operating expenses in sudden and unexpected situations, like a machinery breakdown or a pandemic lockdown.
Related: What GST-registered business should know about filing returns?
6. Design an exit strategy
The first step of your exit strategy would be to always keep a route ready. For instance, keep your business processes streamlined, litigations settled, and compliances met. This will keep your business ready for sale when the right offer comes around, even if it comes before you plan to retire. Your business must have not only respectable assets and worth, but also its liabilities under check. With a robust income statement and a good presence in the market, prospective buyers will see good commercial sense in your business. You may seek legal and financial advice on how to conduct your business sale in the right manner. As your planned retirement year approaches, you should be able to hand over your business for a price it is worth.
Related: Retirement planning for pros: National Pension Scheme
Last words
Small business owners often consider themselves inseparable from their business, and rightly so. This stops owners from thinking about retirement, let alone planning it well. But securing one’s financial future is an essential exercise, and small business owners cannot choose to ignore it. Retirement Planning: 55% of senior citizens regret not saving enough for retirement.
A small business is run by a team with often one or two people at the helm. The owners are the heart and soul of the small business and much of the show is run by them. By giving their all to the business, they risk losing sight of their financial future and security. The owner of a small business can and should plan their post-retirement future, and run the business with retirement as one of their long-term goals.
Here are a few handy tips that can help small business owners retire from their business on their terms.
1. Remunerate yourself
Often with a small business, the owner and the business are practically the same. But this need not be so, at least from an accounting standpoint. Under the ‘separate business entity’ concept, you and your business should be considered as two different entities. Accordingly, your business should remunerate you for the efforts you put in to run it. It may seem like taking money out of one pocket and putting it in another, but remunerating yourself can change your perspective towards running a business. And having a regular income in your account is the starting point towards structured retirement planning.
Related: Here's what I did when I started my business
2. Don't hesitate to seek financial advice
Unless you are a financial consultant yourself, there is no reason why you shouldn’t see one for your business and personal financial planning. With professional advice, you will be able to streamline your finances and get your financial goals in sight. A financial adviser can also advise you on important investment decisions regarding retirement financial planning, maximising retirement benefits and guide you on the right approach that you would have otherwise not given priority to. The advisor can also help assess shortfalls in your health and life insurance plans to ensure the safety of your family’s financial future.
3. Plan your retirement goals
Setting out clear retirement goals will help you to get financially secured and build the retirement corpus of the right size, and also plan your exit strategy. You should set your retirement age, consider your remaining active years, your post-retirement plans, your post-retirement financial needs based on standard of living, identify alternative sources of income, monetary benefits from handing over your business after retirement, etc. With the size of the corpus figured out, you can focus all your efforts on building a retirement account in a more organised manner.
Related: Gold loans opens up opportunities for small business
4. Build a retirement fund
Apart from the tax benefits they offer, provident funds are also a standard retirement corpus for most salaried people. However, a small business owner has to diligently set aside a retirement fund through a bouquet of investment instruments. Investments like PPF, LIC policy, National Saving Scheme, and National Pension Scheme are some of the popular types of retirement planning tools that can not only build your retirement corpus but also give you a tax advantage. It is important to start early, even if it is a small amount. The benefit of compound interest can be best earned if the contributions to the plan is made for a longer duration. Apart from safe investments, you can also save and invest in mutual funds or direct equities for higher returns and lucrative retirement benefits. As you remunerate yourself from your small business, you can divert some of it towards the retirement corpus.
5. Protect your worth
If your business is continuously bleeding your business budget, maybe it is time for you to switch to a different business. But if it generates regular income and profit, the major goal for you would be the sustainability of the business. Many small businesses fold up despite good revenue due to a lack of financial foresight. Apart from reinvesting your initial cost of purchase, it is important to plough back a portion of your profit into the business. Another portion of the profits should be used to maintain liquidity. If there is a temporary lull in the market, this cash reserve will help you to meet your fixed costs and keep your business afloat. Another important way to protect your business is to build an emergency fund. This fund can help you meet operating expenses in sudden and unexpected situations, like a machinery breakdown or a pandemic lockdown.
Related: What GST-registered business should know about filing returns?
6. Design an exit strategy
The first step of your exit strategy would be to always keep a route ready. For instance, keep your business processes streamlined, litigations settled, and compliances met. This will keep your business ready for sale when the right offer comes around, even if it comes before you plan to retire. Your business must have not only respectable assets and worth, but also its liabilities under check. With a robust income statement and a good presence in the market, prospective buyers will see good commercial sense in your business. You may seek legal and financial advice on how to conduct your business sale in the right manner. As your planned retirement year approaches, you should be able to hand over your business for a price it is worth.
Related: Retirement planning for pros: National Pension Scheme
Last words
Small business owners often consider themselves inseparable from their business, and rightly so. This stops owners from thinking about retirement, let alone planning it well. But securing one’s financial future is an essential exercise, and small business owners cannot choose to ignore it. Retirement Planning: 55% of senior citizens regret not saving enough for retirement.
