Balancing your Business Plan with your Financial Plan
Small business owners seize opportunities across industries, markets and geographies. Some people are looking for a challenge. Others are switching out of careers to do something that holds more meaning for them. Then there are those looking to build something of their own to pass on to their children. Whatever the reason, starting a business can be very exciting. It can bring new opportunities as well as the freedom of being your own boss. If your family members will be involved, you can benefit from the satisfaction of building an enterprise together as well as the tax benefits that income splitting brings.
There are also challenges and risks to consider, as running a business can be endlessly time consuming and a stretch on your household finances. You also need to make sure that your goals for the business support your personal goals so that you can meet the needs of your family as well as your business. To give yourself and your business every chance to succeed, here are a few key financial considerations that can help you get off to a good start:
A business plan and a personal financial plan are two different things. Your business plan describes how you plan to earn income and draw some of that income from the business to pay yourself and any family members who might be involved. Your personal financial plan outlines how you are going to use that income to reach personal goals such as paying off a mortgage or funding your children's education and your own retirement.
Although the two plans are different, there are many areas where they overlap. Here are four points to consider that impact on both plans:
- Determine how much of your own savings you can afford to put at risk to start your business.
- Be realistic about when your business will start to generate a profit. Make sure you can support yourself and your family until then.
- Figure out how much you'll need to cover business expenses each month in addition to your own personal living expenses.
- Evaluate the impact of self-employment on your retirement strategy. You may have been planning for a specific retirement date, but as a business owner, your plans may change.
If you are going to be leaving a job to go into business for yourself, there are a lot of things to consider. Just like starting a family, starting a business requires a tremendous commitment of time and effort, and will draw time away from other activities in the early stages. Also, if your transition to self-employment was not previously factored into your financial plan, you may have to make some short-term adjustments to your other personal goals until the business gets off the ground. Don't forget to consider these aspects:
- There are benefits to think about.
Don't forget that your job may have provided other benefits that you will need to replace at your own expense. Make sure that your life and disability insurance is adequate and consider replacing extended health benefits.
- You have responsibilities as your own employer.
When you were an employee, you only paid half the total CPP contribution, and your employer paid the other half. Once you start earning income, your CPP contributions will effectively double as you will be responsible for paying both the employer and employee portions.
Starting a business is an exciting and challenging time. While it's natural to focus on all the benefits that entrepreneurship can bring, you also have to consider how to protect yourself from the unexpected. Here are some of the pitfalls you may want to keep in mind:
- Lack of diversification
The natural tendency of many entrepreneurs is to reinvest profits back into the business. However, you need to bear in mind that, if the business runs into financial difficulty, a good portion of your assets will be at risk. It's also not wise to assume that the sale of your business will provide you with all the retirement income you need. Make sure that you draw enough income from the business each year to fund your personal goals as well as your retirement savings, whether that be in the form of RRSPs, TFSAs, or non-registered accounts.
- Insufficient protection against death and disability
It's good financial planning to protect your business against the risk that you may not be around to run it. In addition to having life and disability insurance in place to protect you and your family, you may need to consider, office overhead insurance, business loan protection and key person insurance to ensure the continuity of your business.
- Inefficient planning for personal income
How you draw your income will depend on how your business is set up. If you're a sole proprietor or partner, your personal income will consist of what's left after you cover the expenses of the business. If you're incorporated, you have the choice of drawing a salary and/or receiving dividends from the profits of the corporation. It's important to understand the difference between the two –dividends may receive more favourable tax treatment, but only salary qualifies as earned income for CPP and RRSP contributions. A financial planner* can help you evaluate which approach is right for you.
While many entrepreneurs start funding their business from personal savings, that often takes you only so far. Borrowing from friends and family can be a challenge, as money and friendship often don't mix. Conflicts can arise if profits don't materialize as quickly as you had hoped or if your loved ones don't agree with the business decisions you're making.
You may also need to be prepared to divert funds from other personal goals in the short term to meet the needs of your business. You need to communicate this possibility to your family ahead of time.
For many entrepreneurs, business debt is considered personal debt and lenders will often require you to personally guarantee the loan. This will affect the amount of money you can borrow in the future, say to buy a home or vehicle. BMO understands that juggling personal and business finances at this time is important. This is why they realized the need to serve both the personal and business banking need.
Starting your own business can be an exciting and daunting time. Being your own boss is an appealing prospect, one that countless Canadians seize with anticipation every year. A financial planner can help as you build confidence in your business. By taking a closer look at both your personal and business plan, and helping you create a clear picture of how this new venture will impact your family's short-and long-term goals, a BMO financial planner can help you ensure you are setting yourself up for success.
Let's talk. Call a BMO Financial Planner today at1-888-389-8030
* BMO financial planner refers to Financial Planners, Investment and Retirement Planning that are representatives of BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal.