Business Financial Planning

The busy day to day activities of running a small to medium enterprise or company (from a one man show to an organization with multiple employees), can often leave the business owner(s) or management, little time to focus on the importance of establishing or fine tuning the nuances of a financial plan for their business.

For those that have not established a plan, they are often of the belief that their business is too small or the business's profit or turnover is not significant enough to warrant the added expense of financial planning services, as every cent that is earned is re-invested into the business, or that the importance of doing so does not occupy space on their list of priorities.

In this day and age, the complexities of strategic financial management in the arena of investment management, superannuation for staff/employees, business protection (i.e. insurances in relation to its liabilities, overheads, key employees, partner/shareholder protection, income for business owners) and ultimately succession of the business itself, can often be overlooked or placed in the too hard basket.

As this is often the case, it is not surprising that many small business's do not succeed or perform to its utmost capacity or ability as a result of not possessing a sound business plan with contingencies. Moreover, the situation can often be exacerbated by not employing or implementing a business financial plan, creating a roadmap by ascertaining the current status of the business and subsequently identifying financial strategies to create business efficiencies in the aforementioned areas of Superannuation, Insurances and Managed Investments.

Given the importance of superannuation as a savings tool for our futures and the recent government changes which can obviously have a big impact on the lives of employers, employees and individuals, we have highlighted some of these important changes. These include;

Choice of superannuation fund:

  • From 1 July 2005, the government has introduced a new law that provides many employees the right to choose which superannuation fund will receive their employer superannuation guarantee contributions.
  • Claim a full tax deduction (for Employers)
  • Employers can now claim a full tax deduction for all employer contributions, or before-tax contributions to super for staff who are less than 75 years of age.

Tax-free super payouts from age 60:

  • From 1 July 2007, everyone who has paid tax on their super can look forward to paying absolutely no tax on their super payout after they turn 60. Whether you take it as a lump sum or as a superannuation pension, you'll pay no tax on your payout, as long as you take it after 60. You won't even have to declare it on your tax return.
  • Lower tax on payouts from untaxed super from age 60
  • If you have untaxed contributions (mainly public servants) you will still be taxed on your payouts. This is because you haven't paid any tax on these contributions. However, the rate of tax will be reduced once you're aged 60 or over.

More flexibility and choice in how you take your super payout:

  • Until now, there have been strict rules about how and when you took your payout. For example, once you reached 65 and were no longer working, you had to take out all your super - whether you wanted to or not.
  • From 1 July 2007, things will be much more flexible. To take the same example of someone retired over 65: you can take some of your super out - as a lump sum or as a pension - and leave some in to continue making money. Or you can work part-time and keep adding to it.

A better pension deal for people with assets:
  • Under the current rules, people with quite modest assets lose access to all or part of government pension payments. From 20 September 2007, the rate at which your Age Pension is reduced because of the value of your assets will be halved. This means that many people will receive more money. Some of them because they will become eligible for a pension for the first time, while some current part-pensioners will have their payments increased.

A better deal for the self-employed

  • From 1 July 2007, if you are self-employed you will be able to claim a full tax deduction for your super contributions. You may also be eligible for the Government Super Co-contribution scheme if you make after-tax contributions.
  • Easier to find and transfer super from different jobs
  • If you have a number of super accounts from different jobs, it's probably a good idea to join them all together in the one fund to save on administration costs and fees. The process has now been simplified so that all you have to do is fill in one form and send it to the super fund of your choice.

These are just some changes that will affect individuals and employers. By having a good understanding of these changes, employers and employees can better structure their savings plans to take advantage of these changes to suit the unique circumstances of each individual.

By way of a simple example to highlight the importance and advantage of keeping abreast of these changes; when superannuation choice legislation changes were made, employers were struggling to meet their obligations under the choice of superannuation rules. A survey of 400 employers by industry fund Superannuation Trust of Australia found that 40% of employers had not handed out super choice forms to their employees by the July 28 deadline. One in five had not chosen a default fund. Of those which had already chosen a default fund, more than 90% have continued with their pre-existing relationship with a superannuation provider.

Consequently, many employer's and employees did not act on the opportunity to take advantage of this choice, which may have allowed them to perhaps restructure their individual super from balanced to growth or an alternative arrangement to take advantage of the prevailing economic environment.

This highlights a deficiency in implementing and executing these changes that could have facilitated better results for employees and ultimately employers. Conversely, if opposing action had taken place, employees may have viewed their employer as showing concern and being attentive to the welfare of its employees. Hence, the positive action could have created the view for employees that its company is the company of choice, ultimately creating higher staff retention rates.

Published on July 7-th, 2008 in Financial Planning
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.