Many businesses have large amounts of money squirrelled away in the bank, not contributing to the company. Martin Baltazar of Think Independent Financial Planning explains how this money can be put to work through the concept of 'wealth creation'.
While the British Chambers of Commerce is urging the Bank of England not to raise interest rates again and predicts a slowdown in economic growth next year there are businesses within the UK that have large reserves of money sat in bank accounts. This is money that is not contributing to the success of the business or adding any value on a weekly, monthly or annual basis and if an economic slowdown is going to happen then those with the smart money should consider wealth creation strategies.
Money in the bank is not unique to British businesses and regardless of where you and your business are based the principles of wealth creation are the same – let your money do more while you do less.
WHY DOES THIS HAPPEN?
Business managers and owners get into the mindset that having a cash reserve is a sensible option. It's safe. But there are strategies that can make this capital work for its keep and actually contribute to the bottom line of the business – without the business actually having to produce or sell more products or services.
The kind of money in reserve is not small change – we are talking about thousands of pounds and in some instances, hundreds of thousands of pounds.
Wealth creation is about making money work harder and the same principles apply whether this is money that belongs to an individual or a business. Take a scenario of turning 60k into 500k over a ten-year period using essentially two primary creators – gearing and compound interest. These are the hallmarks of a wealth strategy for future success.
Are there risks involved for this type of investment portfolio? Any investment carries risk but over a ten-year period this mix of portfolio could bring much better returns for investors and on conservative assumptions based on the Financial Services Authority allowable rates of return the mix of gearing and compound interest has the potential to dynamise returns by 150% over straight 7.2% p.a. compound interest – instead of £100,000 becoming £200,000 in ten years it could become £500,000.
THE WEALTH CREATION CONCEPT
This is a fresh approach and it is acknowledged that not everyone is going to be comfortable with this style of investment but the indications from those businesses that have invested their money are positive.
In many ways this style of wealth creation is about thinking in a non-conventional manner to achieve the best results available, which is why it appeals to many entrepreneurs and business leaders who are prepared to think laterally to gain the best business result.
Given that the latest figures released by Barclays show a substantial rise in the number of budding entrepreneurs opening their doors for the first time – an estimated 110,300 new businesses started up in the first quarter of 2006 (this figure was the second strongest first quarter on record since Barclays started tracking the market in 1988). The UK is becoming a country of innovation – and with that, innovative ways of developing wealth go hand in hand.
Small businesses should not be underestimated. The EU defines SMEs as having less than 250 employees, with a turnover of up to €50m and despite what many of us may imagine, 99% of all EU businesses are SMEs.
- 91% of all EU businesses have 1-9 employees ('micro')
- 7% have 10-49 employees
- 1% have 50-250 employees
- 1% are defined as 'large enterprises'
For those prepared to be the early adapters, wealth creation as a strategic decision, either for the business or the individual, that can pay dividends in terms of outcome. In this instance it isn't even about a portfolio of investment that isn't working hard enough, the simple focus here is about money in your bank account.
WHAT ABOUT PENSIONS?
The pensions debate still rages but there never appears to be a clear solution. The government in the UK has already identified that 12.1 million people aged 25 or over are failing to save enough for a comfortable retirement and has hinted that a recommendation could be introduced for compulsory saving and an extension to the retirement age to 70.
Whilst it is widely acknowledged that the younger generation are not saving, those who have contributed to pension funds have lost confidence and are seeking other alternatives for their financial investment, which may have a long-term view but which they consider to be safer than their existing pension.
These options include investing in property for rental both in the UK and abroad and this statistic is endorsed by The Council of Mortgage Lenders, which indicates that the residential buy-to-let mortgage market now makes up 8% of UK lending, compared with 7% in the first half of 2005. Demand is further being fuelled by economic prosperity and population migration from EU accession countries which has in turn increased rental demand, making conditions better for buy-to-let investors.
For those business owners who are older the issue may be at what age they wish to retire and planning that exit strategy is as important as all of the other business decisions that are made daily for the business.
From a wealth creation perspective the advice would be to ask not what you expect your current pension portfolio to deliver but what sort of lifestyle you want, and how much money will you need to sustain it. Whether the answer is a property in the sun or a specific level of income per annum both of these can be effectively planned for. Using wealth creation strategies, existing pools of money can be reinvested in portfolios that offer higher returns than, for example, existing pension funds.
DOES WEALTH CREATION WORK?
It's a fact that the money that both you and your business have can work harder without you having to do anything - you don't have to work more hours, the business doesn't have to produce any more products or services. If you or your business has money, even if it is currently in the framework of another investment portfolio, that money can be used to create greater wealth.
The strategies that are being adopted to undertake this increased financial performance are being brought to you by innovative financial thinkers who are looking beyond the 'now' and seeking to create improved financial wellbeing for the future on a continuous basis using specifically tailored strategies to suit your needs.
So, you have to ask yourself – can you and your business afford not to adopt a wealth creation strategy?
