In South Africa, 70 to 80 percent of businesses do not make it past the five-year mark. On the personal financial front, we are often told that only 6 percent of South Africans can retire comfortably. What both of these statistics reveal is that achieving financial success is not easy. Instead, it requires hard work and a clear strategy. Although many will accept this is part and parcel of achieving business success, few are willing to invest similar time in their personal financial success.
The challenges faced by business and personal finance can be similar:
* Cash flow is the origin of monetary survival. Cash flow is the cumulative scorecard of your collective business/individual decisions. Businesses generate cash flow from the successful management of a product/and their operational resources. Individuals generate cash flow from selling time and knowledge for salaries/self-employed income. Individuals need to manage the consequences if their cash flow suddenly dries up due to retirement, retrenchment, illness, old age or death.
* Credit management. The level of business/personal debt should be carefully managed and is a key indicator of future financial progress (considering the cost of credit). Credit adds risk within each business and personal finance scenario and is one of the biggest stumbling blocks towards reaching financial independence.
* Diversification. Successful businesses diversify their income streams to be less dependent on one product, market, currency or geography. Investors should aim to diversify their assets across different asset classes, currencies, geographies and service providers.
* Succession. Succession planning (who takes over ownership/management) remains key for long-term business survival. Similarly, you will need to take these decisions in your personal capacity when leaving assets behind to benefit your loved ones. These decisions rest on liquidity, legislation and costs (also tax) considerations.
* Insurance. Long-term (buy and sell agreements/keyman) and short-term insurance are vital for business continuation (cash flow). Not all business risks can be managed by good managers. Risks that cannot be managed have to be insured. Insurance brings these risks down to an acceptable level. Individuals should ensure their lives, assets, income and health to prevent their financial plans derailing.
Businesses place these important decisions in the hands of trusted, trained financial professionals due to the complexities and enormous responsibility these decisions carry. Individuals generally underestimate the complexities of their own financial planning and often unknowingly pay the price for this.
It is important to note that it's senseless to do any personal financial planning, if business owners have not undertaken advanced business financial planning. Many business owners’ massive, undiversified wealth lies squarely within their own businesses.
Richus Nel is a financial adviser at PSG Wealth Old Oak.