While spreading your professional wings is important, extracting wealth from your consultancy is what taking the plunge from executive to consultant and being in business is all about.
In the early days of making the switch, cashflow can be tight. Even so, it’s important to be in the habit of paying yourself, and that includes superannuation. To learn more about growing your personal wealth, planning and protecting your financial future as a self-employed consultant.
The Association of Superannuation Funds Australia (ASFA) conducted research a couple of years ago that indicated self-employed people typically have low superannuation balances, and an astonishing 20% have no superannuation at all*.
Salary & Superannuation
It’s a legal requirement to pay your staff superannuation but for sole traders and those in partnerships, it’s optional. However, if your business structure is such that you are an employee with a PAYG set up, you’ll have an obligation to yourself as well.
Either way, it’s important to pay yourself a salary and superannuation, and to use it to your best advantage. This is where financial planning and tax advice merge.
Financial planning wise, your goal should include maximising your take home pay, using any surplus cash to your advantage and creating a worthwhile retirement nest egg for when you’ve finished working.
Having adequate working capital in place is necessary for all start-ups. Then as you win new business and get paid for your contracts, your P&L and cashflow will determine how much you can regularly commit to your wages and superannuation.
Most accountants will tell you, if you leave cash to languish in a business account, it will be eroded by day-to-day non-essential expenses, and it will be at risk should you find yourself in a legal dispute.
For consultancy owners, extracting cash via superannuation delivers worthwhile tax benefits.
Salary sacrifice, up to $27,500 per year has a dual benefit. Firstly, it reduces your taxable income which creates more take home pay. Then it enjoys a low 15% tax rate in the super fund, rather than the burden of your personal tax rate which can be as much as a 45% (plus 2% Medicare Levy).
Personal Risk Strategy
Business owners are usually quick to implement professional indemnity and public liability insurance, cover their premises, work vehicles and ensure their WorkCover for employees is implemented as well.
However, for consultants who are the main source of their business income and own livelihood, personal insurances aren’t always afforded the same level of priority.
While it may be tempting to sign up for quick and easy insurance, the sort you see advertised on the TV, the fact of the matter is insurance and health underwriting can be complex. Some of the advertised insurances often have pre-existing conditions exclusions which can render the insurance invalid. In my experience, there are no short cuts when preparing a personal risk strategy.
For consultancy partners, buy-sell arrangements are a further consideration, and an insurance policy is often a main funding source should a trigger event such as death and disability activate the terms of the agreement for a partner to be paid out.
Succession and Estate Planning
When you’re a consultant responsible for your business, meeting valuable client contractual obligations and protecting your livelihood and those of the people who work for you, succession planning and estate planning is a necessity.
Even though you’re at the start of your self-employed consulting career and there’s a long way to go before you’ll think about selling and, hopefully, even longer before you leave this mortal coil, succession and estate planning enables you to protect your business assets, personal assets and wealth.
Both are complex matters that require collaborative advice for implementing legal structures and documentation, including Wills and Powers of Attorney, while considering what can be significant tax impacts, which collectively affects your personal financial legacy.
Leaving your affairs intestate (without a Will) should never be an option. A Will and estate plan for matters not covered by your Will, ensures clarity for beneficiaries who must manager your affairs in a time of grief and duress.
Next steps
Financial planning is the cornerstone of success and as a former Mining and Resources executive turned business owner, I know from personal experience.
When you are on the verge of a life changing event such as making the shift from a highly salaried executive to a self-employed consultant, there’s much to consider. You’ll know a lot of the steps, but there are others you won’t.
There are many reasons why executives become self-employed, and usually it boils down to lifestyle. Having the freedom to follow your professional goals, to prosper and enjoy the benefits of self-made wealth.
In financial planning circles, there’s a well-worn saying: “the best time to plant a tree was 10 years ago, the second best time is today.”
May I invite you to contact me for a discussion about financial planning, and in particular, how to extract wealth from your consultancy for your personal prosperity.
Please contact Brett Cribb on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au
Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting and business advisory services for executives, professionals and business owners in the mining and resources sectors.
Further Reading:
Craig Barry: From Executive to Mining and Resources Consultant
Robert Lamb: Non-solicitation and intellectual property (IP)
