Women in business face additional challenges to those faced by men. Women often have to find a delicate point of balance between business and family life. This balancing act can result in periods away from the business. The important question then becomes: Why am I in business?
On the surface a very simple question but one for which there are many answers, probably as many answers as there are people in business. Each of us has our own unique and personal reasons for going into business.
Investment Choices
As businesswomen, we have various financial options.
- Should I reinvest my surplus cash flow:
- in my business;
- into a retirement fund; or
- into something outside my business that will create wealth I can fall back on?
Your decision should be based on both your personal and professional needs. The balance between these choices will be a personal thing.
When deciding your financial future, ask yourself:
- Why am I in business in the first place?
- Do I plan to grow my business?
- When and how do I plan to exit my business?
- How will I pass on my business so the value I have created is realised?
Critical to our ultimate financial success and personal happiness is the successful resolution of four major dilemmas:
1. Why am I in business in the first place?
This is a key question we all need to ask ourselves.
For many women, self-employment is initially a lifestyle choice. But if a business is to be successful, revenue growth and profitability must become central issues. Every business needs a plan. Without proper strategic planning, commercial uncertainty, long hours and hard work may not yield the desired rewards.
Critical points to consider:
- Management of cash flow and tax liabilities, including GST and business activity statement (BAS) obligations is essential.
- Diversification of risk. Should all surplus cash flow be reinvested in the business?
2. Do I plan to grow my business?
Those of us who are entrepreneurs face additional challenges associated with business growth. There must be well-documented systems and processes. Greater demands will be placed on our management skills.
With this demand, however, comes greater potential for wealth creation. This is because the business can assume an identity separate from our own. Customers and staff identify with our business rather than with us personally. We have created a valuable saleable asset.
Critical points to consider:
- Business structures also assume greater importance. Up until this point, we may have operated as a sole trader under our own name. Should we take on a business partner? Should we operate as a partnership, company or family trust? There will be taxation, legal and possibly estate-planning considerations associated with each structure.
- The Ralph Proposals to reform the Australian business taxation system have caused many small businesses to examine the appropriateness of their current business structures. Business capital gains tax concessions that might be available to a sole trader upon the sale of a business, may not be available when a company or trust structure is used. Some current tax and cash flow advantages of family discretionary trusts may not be available, if tax is imposed on trust income at the trust level before distributions are taxed in the hands of beneficiaries.
3. When do I plan to exit my business?
This critical question is often only addressed just prior to retirement. Your exit should be planned and managed as carefully as any other facet of the business.
Critical points to consider:
- The time leading up to the intended sale of your business will determine the time horizon for your investment strategy. If you plan to sell your business next year, your approach to investments will be vastly different to the approach you will adopt if you intend to sell and exit the business in 15 years time.
- The higher the risk, the higher the expected return. Investment for higher return may bring higher variability in annual returns, or a lack of liquidity. Investment strategies need to be appropriately diversified using a mix of share, property and interest-bearing investments before undertaking any investment outside the business.
4. How will I pass on my business so the value I have created is realised?
You have worked hard on your business over the years. How do you realise the value you have created in your business?
For many people in business, their business is their retirement ”nest egg”. The Government has recognised this fact and there are now generous capital gains tax concessions.
Aside from eliminating a potential capital gains tax on the disposal of your active business asset, the concessions allow you to convert business assets into superannuation assets. The advantage of this is that if there is a tax-free rollover into a superannuation fund (there is no contribution tax or surcharge), benefits are tax-free when taken in cash – provided they are not in excess of the reasonable benefit limit, or tax-free if taken as retirement income.
How do you make an investment decision?
Now we have an understanding of what we need to be aware of when deciding where to invest our surplus cash flow, let”s take another look at your investment choices and illustrate the pros and cons of each.
o Invest in my business
Advantages:
- increase working capital to fund further business growth
- available cash to seek new opportunities
Disadvantages:
- no diversification of risk
- no protection from creditors
- more dependency on business to fund retirement
o Invest in my retirement
Advantages:
- specific provision creates certainty of income for retirement
- tax effective use of excess cash flow
Disadvantages:
- money cannot be assessed prior to retirement age
- money cannot be used as security for further borrowings
o Invest in something outside of my business that will create wealth that I can fall back upon
Advantages:
- more immediate control of funds
- can be used for security for further borrowings
- some options provide a degree of tax effectiveness, such as fully-franked dividends
Disadvantages:
- cost of investing versus re-investing in own business
- market risk
At this time, there are a great many investment vehicles available, such as managed funds, property, margin lending and warrants. The options can some-times appear daunting.
Successful investment does not just happen.
Like every other successful consequence in life, it is the result of a well thought out and implemented strategy with the focus on achieving goals that are meaningful to you. It is worthwhile, therefore, to seek out competent professional advice.
Important information:
The information contained in this article is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular needs, investment objectives and financial situation.
