by Nthabiseng Mokone, CA (SA), Tax Practitioner, Wealth Manager & Entrepreneur Owner: MMCP Wealth and MMCP Business Advisory Services
The freedom and flexibility of being self employed comes with its own challenges and risks. These can however be mitigated and when that is taken care of, as an entrepreneur you can say you are truly free. Most entrepreneurs are the business and any chance that they are unable to work, will drastically affect their business. As a self-employed professional, I have first-hand experience in the effects of an illness and trauma on my business.
Economic circumstances and fluctuating incomes may also affect the business and force the entrepreneur to reconsider the strategy of the business within a very short space of time. This is a bigger financial risk for the business, as no strategy can be changed overnight to alter the financial position. This then lives the entrepreneur with an option to consider risk cover. This can range for business assurance to personal risk cover. When you work for yourself and are the keyman in the business, one cannot afford to be sick as there is no sick pay or have employee benefits. I have over the years seen entrepreneurs who have ruined their family lives by not considering the risk of business failure and death. The family would be left wanting and stranded as there is not a single alternative source of income after the closure of the business, death of the keyman or trauma.
Some of the strategies to implement in dealing the risk include having:
1. An emergency fund,
2. Income protection,
3. Estate planning.
An emergency fund
Experts in finance will advise that an emergency fund should be at least 8 months for employed people. For an entrepreneur, I would say between 3 months and 12 months depending on the industry you are in. A doctor can afford to have a locum working at the practice and the practice will generate some income. For a consultant who gets consulting projects that pay huge sums of money ones in a while, I would say 12 months as that’s, as consulting projects can take a while to come by in difficult economic conditions.
This should be the next strategy. This is not as simple for an entrepreneur, as it would for an employed person. Insurance companies have now come up with products that can take care of the risk. There could still be a challenge for entrepreneurs who would normally get lump sums or variable income, as insurers do not allow for lump sum premiums or it would be difficult to determine the level of income for income protection purposes. For income protection the general rule is that one cannot be in a better financial position after the claim than you were before. Insurance companies have a set formula on how they determine the income, as it is based on the last income received before the trauma or the illness.
Business expenses do not generally go away, when an entrepreneur is unable to work. Due to their contractual nature, they will have lock in periods or can only be cancelled after a termination notice has been served. Where the period of absence from work in temporary, those expenses will need to run as normal. This then will require that the business have income protection to cover for those expenses. Overhead expense benefits are applicable to businesses where the insured is essential to the ongoing generation of income of the business, such as a doctor, attorney or business consultants. That being said, there are a myriad number of insurance products that can mitigate the said risks.
Entrepreneurs in most cases, invest all their being in the businesses and that could be a risk as well for estate planning purposes. As an entrepreneur who is a co-owner, have you thought that there could be much risk for your family as well. Permanent disability can mean that the entrepreneur is unable to contribute in business, resulting in him or her being side-lined in business or worse, should there be death, the remaining spouse could be side-lined by the remaining shareholders. Specific risk products can mitigate that risk and the remaining shareholders can buy you out of the business or the remaining spouse can be paid for your shareholding in case of death.
Consider having the services of an Independent Financial Advisor that can help in putting a plan in place to deal with the identified risks.
Nthabiseng Mokone is currently the Principal Director of MMCP Group of companies. She is a seasoned Chartered Accountant, Tax practitioner and Businesswoman. MMCP Wealth is a wealth management company that is solution based and the advice provided is “advice-based planning”. MMCP Business Advisory Services Practice providing transversal integrated solutions to clients. The business is registered with SAICA as an accounting practice.