Small businesses are the core of the Canadian economy. Entrepreneurship and creativity have been moving our economy for centuries. In fact, Canada has one of the best grooming environments for start-ups and small businesses. Business owners spend several years building up their business. They invest a significant amount of personal time and capital to grow their companies. Many small businesses will have their personal and family finances locked in their business. Focused on their business, often the founders of small firms ignore or delay their personal financial planning until they come close to retirement.
That has been gnawing at me for a while. A core part of financial life planning, is to start early and try to balance your personal and business objectives, both current and future, all at the same time. So, I thought I would spend some time and focus on this concept for this article. Here are several practical steps that small business owners can follow to establish a successful financial life plan.
Balance goals
The first and most important step in the personal financial life planning process is setting your short and long-term financial and life goals. In many cases, business goals can interfere and clash with personal goals. Business goals to expand into a new market or lease a new retail store can negatively interfere with your personal goals such as saving for retirement or post-secondary education for your children. Striking the right balance between your business and personal goals is a key to achieving them. Prioritizing one over the other may hurt your own long-term financial success.
“Before everything else, getting ready is the secret of success.” Henry Ford
Explore financing
Every small business idea requires capital to start. Sometimes, the success of the venture depends on the entrepreneur’s ability to secure financing. Sometimes, the funding comes from personal savings or the sale of property. Other times, the owner needs to look for external funding within his or her social circle or even approach a financial institution. The external financing can be in the form of a loan or equity stake.
Another great way to finance your idea is your customers. In fact, your clients are one of the best and most inexpensive sources of financing. If your customers love your product or service, they may be willing to give you an advance or down payment, subscribe to your products or platform, or consider a product service exchange.
Control costs
Even the best idea can fail if it doesn’t generate a profit. In simple numerical terms, company revenue should be higher than expenses. Many ventures fail because the company cannot generate enough revenue to cover all costs. Clearly, the first answer will be to generate more revenue.
However, many successful companies are notorious with their focus on cost control. Small business owners must stay on top of their expenses. They must track and analyze each cost. Owners should look for operational deficiencies and overlaps, result-based compensation, economies of scale, and ways to increase productivity.
“Planning is an unnatural process; it is much more fun to do something. The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression.” Sir John Harvey-Jones
Manage liquidity
Small businesses need cash to maintain healthy growth. Take the example of prominent investor Warren Buffet. He prefers to invest in companies generating significant cash flows. The capacity to produce cash from its operations will determine the company’s ability to pay its employees, creditors, and vendors. Building a disciplined system of managing receivables and payables and maintaining a cash buffer for emergencies are key.
Manage taxes
Filing and paying taxes is a long and painful process. Current provincial and federal tax law is very complex. Often, your tax bill depends on your company's legal status. Sole proprietors have different taxation rules from corporations. Small business owners need to speak to an accountant or tax lawyer to find out what legal status works best for them.
To avoid missed opportunities and last minute mistakes, you must prepare for the filing process in advance. Start early. Keep a clear record of all your expenses. Track all tax filing dates. Remember to pay all federal, provincial and municial taxes, source deductions, local permits, and fees. Hire a bookkeeper or contract with an external bookkeeper. Consider using professional bookkeeping software. Most definitely work with a professional accountant.
“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” Peter Drucker
A retirement plan
Having a company retirement plan is an excellent way to save money overall. Retirement plan contributions could reduce current taxes and boost employees' loyalty. There are a few alternatives such as defined benefit and contribution plans, and group RRSPs.
A safety net
Creating a safety net is a critical step to protecting your wealth. Many business owners hold a substantial amount of their assets tied to their personal business. By doing so, they expose themselves to a concentrated risk in one company or industry. Any economic developments that can adversely impact that sector can also hurt their personal wealth. The best way to build a strong safety net is asset diversification.
An estate plan
Estate planning is the process of arranging the disposal of your assets after your passing. It can involve your family members, any business partners or other individuals and charitable organizations. Estate planning may start with setting up a family trust and personal will and can also affect financial, tax, medical and business planning. You can use estate planning to eliminate uncertainties over the administration of your assets in probate and to maximize the value of your estate by reducing taxes and other expenses. The ultimate goal of estate planning can be determined by your specific goals and may be as simple or complex as your needs dictate.
Plan for succession
A successful business will have an impact on various parties such as owners, employees, contractors, vendors, clients, landlords and suppliers. Creating a business succession plan will ensure that all parties' interests are met in the event you decide to discontinue your business or pass it to another person. Moreover, a robust plan will address numerous tax and financial issues which will result from the succession. The complexity of the succession plan will depend on the size, industry, and legal status of your business.
Commonly, a lot of small business owners will tell me that they have so many balls in the air and that actual business and financial planning is low on their totem pole. I would suggest that one of the primary reasons for this is that the subject is sometimes a foreign concept to them. But one of the most important tools available to entrepreneurs is leverage. Planning is paramount and, if you cannot find a way of personally getting it done, turn to a financial planner and other advisors. We can hope for success but often cannot foresee failure. It’s a safe way in Keeping Life Current.
Steve is the SBCN Community Mentor and can be reached at steve@NorthernRiverFinancial.ca
- Log in to post comments