“It’s a long journey to build a business. I don’t see how it can be done quickly. Maybe finding a rich gold reserve? But even then, it is a long way to be processing it and banking a surplus.”
We know that running a successful business takes commitment, and success is rarely achieved overnight. The quote above came from a recent conversation with a Western Australian business owner and captures the continual rollercoaster of growth and setbacks experienced by businesses before consistent financial success appears.
The Unique Financial Challenges Business Owners Face
It left me contemplating the big question that many business owners face: “How do you balance the unpredictable funding of the growth of your business with extracting wealth to de-risk your personal financial affairs and finance your family goals?”
It is an interesting dynamic, with no ‘one size fits all’ solution. However, there are strategies to build more certainty.
In my experience, business owners will prioritise the funding of their business growth above everything else. As one client recently told me, ‘What the business needs, it gets’. Sometimes this is out of necessity, but it can also be driven by business owners’ unique perceptions around risk and their business. Whilst an outsider may view a business owner as a risk taker, business owners usually enjoy the fact that they are in control of their biggest asset. Driven by growth and a desire for success, they will usually prioritise reinvesting profits back into their business. As a successful business grows, the financial returns from this reinvestment are usually high, typically much better than investing in shares, property, or superannuation, which makes this an attractive proposition.
Balancing Reinvestment and Personal Wealth Extraction
While this reinvestment is often easily justified, it is important to regularly take time to reflect on your bigger family picture to make sure that you have a balanced strategy that is not completely reliant on the continued business success or a sale to achieve your family goals. The world is changing, and there is always a risk that any business can be severely impacted by events completely outside of your control.
At an appropriate time in your business life cycle, it is important to have a strategy that involves the ongoing extraction of wealth from your business. For many owners, working out how to pay yourself as a business owner is less about the mechanics and more about giving yourself permission to actually do it. As a client recently mentioned:
“If you don’t take money out of the business and make it accountable, because you are so emotionally attached to it, you tend to make bad decisions and excuses. With all the effort we were putting in, there had to be a reward. Eventually, we decided to set owner dividends as a key performance indicator (KPI) for the business and build it into our overheads. By committing to this strategy, the business adjusted, we maintained our growth trajectory, and have multiplied our personal wealth beyond what we ever could have imagined.”
Businesses can be hungry machines that need refuelling regularly. However, introducing this slight mindset shift can allow a significant opportunity for you to grow your personal wealth, without necessarily detracting from the success of your business. In many cases, by making your business compete harder for investment capital and only funding the best ideas, you end up building a healthier, more profitable and better-focussed machine.
We have found that those who build meaningful, ongoing owner dividends into their business strategy at an appropriate time feel less stressed about their future. Working out how to pay yourself as a business owner properly, rather than leaving it as an afterthought, is one of the clearest markers of that shift. In turn, this allows them to make better decisions across all aspects of their business and personal lives. Consistently applying this strategy and accumulating assets outside of the business will also ensure that your family goals are not at risk or dependent on a business sale.
Tax-Effective Strategies for Business Owners
How profits and owner dividends are structured matters just as much as the decision to extract them. Superannuation contributions, trust distributions, and the timing of income all affect how much of what you extract from the business you actually keep. This is worth planning deliberately rather than leaving to your accountant to handle in isolation each year. Explore our tax planning services for a closer look at how this works in practice.
Planning for Business Exit and Succession
Ongoing wealth extraction and eventual business exit are related but different problems. A business owner who has built personal wealth outside the business has more options at exit, whether that means an outright sale, a gradual handover, or bringing in the next generation. The earlier succession is part of the conversation, the more choices remain available when the time comes. See our guide to business succession planning for more on this.
How a Financial Adviser Helps Business Owners
Owning and growing a successful business is both challenging and enormously rewarding. Our team is motivated to help you celebrate your wins and achieve complete financial security and a deserved sense of accomplishment. It is possible to nurture the business you have worked hard for while looking after your personal needs and family. Guided by your ambitions and values, we are here to support you on that journey.
For a closer look at what this looks like in practice, read our related article on how financial advisers help business owners. If you are ready to start making these shifts, explore our private wealth planning services, learn more about our business owner specialists, or speak with our team today.
