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David Brown

David Brown: Retirement Planning, Beginning With the End In Mind, Part One



Get an early start planning for your retirement.

The step-by-step method of planning your retirement / BY DAVID BROWN

IS YOUR RETAIL BUSINESS helping you with your future wealth and retirement requirements or is it just providing you with a job? 

Beginning with the end in mind means demanding more from your business and more for yourself. It requires an understanding of the ?gap? between required/desired performance and current performance ? something we refer to as the Gap Analysis. 

Your retail business is simply a tool to help you achieve your living and wealth needs both now and in the future.  

It’s important to remember that the return on your business investment comes over and above your ?market? income each year. Your market income reflects your daily activity and is therefore excluded from any return on investment. 


So a business has to generate not just each person’s living wage (more on that later), but also a surplus to build wealth. If a business cannot post a surplus after owners’ salaries, it might also be hard to substantiate goodwill to a potential purchaser. 

Understanding the Gap Process
Otherwise referred to as the ?bottom up? budget, there are four steps to the Gap Process. These are: 1.) The Gap Analysis; 2.) The Gross Profit Gap; 3.) The Sales Gap; and 4.) The Inventory Gap.  

Because we are committed to you actually using this powerful process, we will only cover one step at a time and then have you complete some action steps of your own. 

The Gap Analysis consists of four steps: 

Retirement/Exit Planning (including succession planning)  

Personal Exertion 


Return on Investment (different from GROI) 

Overheads (operating expenses) 

Let’s take a closer look at these. 

Do you work to live or live to work? For those people who work to live, this topic is for you. If you live to work, we recommend staying healthy to enable you to work a long time as retirement is not something you would be able to seriously contemplate right now. 

Setting a retirement/exit target date is not something to be taken lightly or done quickly. The date becomes a ?stake in the ground? that allows further calculations to be completed. This can also be looked on as a timeframe to be ?able? to retire rather than an end date, so going to work becomes a choice rather than a necessity.  

When determining your personal wealth goals, you need to make assumptions about your future lifestyle needs and life expectancy. 
We urge clients to take specialist financial planning advice in this area. 


It is widely considered that you need a minimum of $700,000 of investment capital (over and above your house, art collection, boat etc.) to retire modestly.  

font-family : Verdana, Geneva, Arial, Helvetica, sans-serif;font-size : 15px;color: #333333;font-weight : bold;Example: Let’s say you want to retire with $700,000 of investment capital in 2018, i.e. 10 years time, and you currently have $400,000. That means you need to generate a further $300,000 of investment capital over 10 years which is $30,000 per year after tax. (We will talk more about actual exit/succession strategies at another time.) So the first figure to go into your Gap Analysis is: 

Retirement/Exit Planning ? $30,000


1. Determine required retirement wealth 
2. Set retirement/exit date 
3. Calculate the extra annual gross profit required

Your personal work effort each week (exertion) reflects your market salary. This is normally consumed and does not form part of your wealth calculation. However any retirement plan arising from savings (after living costs) is included in your wealth calculation. 

A good way of looking at this is to ask yourself what you would pay someone else (a manager) to do what you do or what you would expect someone else to pay you if you worked for them. We are trying to establish what you would earn with your skills/experience when running another person’s store. This is to ensure your salary is based on strictly commercial terms. 

If you have to work 50-60 hours per week to complete your role, please add the kind of premium over and above your salary that you’d expect if you were an employee. The business must pay for the hours worked to create the result. 

font-family : Verdana, Geneva, Arial, Helvetica, sans-serif;font-size : 15px;color: #333333;font-weight : bold;EXAMPLE: If the market salary for you role is, let’s say, $50,000 for a 40-hour week and you work a total of 60 hours, your adjusted market salary would be $75,000 because you are essentially doing the work of one and a half people. So the second figure to go into your Gap Analysis is:  

Retirement/Exit Planning ? $30,000  
Personal Exertion ? $75,000

1. Complete your Personal Exertion calculation  
2. Add it to the Gap Analysis

Putting a figure on a ?required return? is as much an art as a science.  

We recommend you seek help from your professional advisers (accountant) in this area as each jeweler’s return will be unique to their specific financial circumstances. 


1. Determine the investment you have made in your business or what your business owes you e.g. $400,000. Some of this may be reflected in your business balance sheet and will include your capital and current account, however let’s say that in Step 2. (Personal Exertion) you calculated your market salary at $75,000 but your business has been paying you only $50,000 for the last five years … your business has been short-paying you $25,000 for five years, which is $125,000, and you won’t find that on your balance sheet. This is payback time. (If you have trouble with this, please seek advice from your accountant.) 

2. Ascribe a financial return that warrants your business risk. As a rule of thumb we use a figure of 27 percent which is approximately halfway between what a willing buyer would offer you for your profit (they normally want a 33 percent return) and what you think is fair (normally 20 percent). In other words, if your business is making an annual net profit of $100,000 a buyer would offer you $330,000 for your business (a 33 percent return) and you would want $500,000 (a 20 percent return). So a 27 percent return is roughly where a willing buyer and a willing seller would settle.  

This return of 27 percent is made up of two parts: 
a) The ?risk free? return, i.e. the rate any bank would pay you for having your funds on deposit with them. 
b) The ?risk premium.? This consists of the general small-business risk (the fact your funds cannot easily be withdrawn) and the specific industry risk (such as a competitor opening up next door to you). 

font-family : Verdana, Geneva, Arial, Helvetica, sans-serif;font-size : 15px;color: #333333;font-weight : bold;EXAMPLE: Let’s say your business owes you $400,000. At a 27 percent return, you should expect to generate $108,000 of extra gross profit from your capital investment. So the third figure to go into your Gap Analysis is: 

Retirement/Exit Planning ? $30,000  
Personal Exertion ? $75,000  
Return on Investment ? $108,000

In this context, ?overheads? refer to all other costs below your gross margin line. 

As your gross margin (profit) is profit after the cost of the item only, overheads are simply everything else. The list would include wages (excluding your own because this has been allowed for in your personal exertion calculation), rent, power, bank fees etc. Basically everything in your Profit and Loss list (excluding product). 

font-family : Verdana, Geneva, Arial, Helvetica, sans-serif;font-size : 15px;color: #333333;font-weight : bold;Example: If your other business costs are $350,000, this figure needs to be added to the Gap Analysis as shown: 

Retirement/Exit Planning ? $30,000  
Personal Exertion ? $75,000  
Return on Investment ? $108,000  
Overheads ? $350,000 

Total Gross Profit Required ? $563,000


1. Complete your overhead calculation  
2. Add it to the Gap Analysis 
3. Add a), b), c) and d) together. This is the amount of gross profit your business needs to generate to fulfill your Gap Analysis.

Congratulations on successfully completing Step 1. Next month, we will calculate your Gross Profit Gap. 
e-mail: [email protected]

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