Successful business owners measure their progress by watching the assets grow on both the business balance sheet and the personal net worth statement.
Unlike their salaried colleagues, successful business owners have many more opportunities to manage those business and personal assets.
Successful business owners have paid their dues by enduring the risks and suffering through difficult times.
We all have war stories to tell about the difficult times and how we learned to overcome them. Eventually, endurance and fortitude have brought you to a point where the rewards and satisfaction seem well worth all the hard work.
Your business is the source of your financial strength and security. Ultimately, it represents your future financial freedom. This is the work that you enjoy doing and you are good at it. At the same time, this is not something that you want to put at risk.
In financial terms, more assets, lower debt and positive cash flow are great starts to managing the success quotient of operating your own business.
However, the following are just a few ideas to start stress-testing your wealth management plans, not just for the next 12 months but for several decades to come:
1) Asset layering. There is a tendency to invest all your resources in the business itself, but that comes with risks if something goes wrong. When the business reaches the point of generating excess profits and cash flow beyond operational needs, successful owners start to diversify their assets. For example, financial assets in the form of TFSAs, RRSPs, Non-Registered portfolios, or even insurance investments can add both security and liquidity to your asset mix.
2) Income layering. Each asset creates a different type of income, which in turn is taxed at different rates. For example, an operating company and a holding/investing company have different rules and tax characteristics that can be managed to the owner’s benefit. Income splitting corporate profits with your spouse or family members adds yet other layers of future income and tax advantages.
3) Analyze your cash flow. When cash flow is tight we tend to fight fires in the hopes of controlling the day-to-day problems that arise. When there is more cash flow than required, life becomes easier.
However, this is also a time to find out how effective the cash inflows and cash outflows are serving your objectives. There may be opportunities to enhance the benefits of all that money that flows through our hands. You never know what can be uncovered until you take a closer look.
4) Analyze your tax returns. The word “tax” focuses on the annual tax returns required by the Canada Revenue Agency as well as the ritual of minimizing tax payable for that year. However, tax planning is concerned about the structure of assets, the income they generate and the ownership of those assets in order to develop longer-term strategic benefits for both the business and the family. The basic question is, “Where do you focus your attention - on the 12-month tax return or the long-term strategic tax planning?”
5) Analyze yourself. Successful business owners find the time to step back from the daily operational problems, which can often be delegated to trusted staff. They find the time to think about the business strategically. This means finding the opportunities for improvement in the way things are done and taking a longer-term perspective.
6) Family level planning. Of course, the business is the foundation for financial wellbeing. However, highly successful business owners also think about family level planning, intergenerational planning and ultimately succession planning. The more success you achieve, the more important these issues become.
7) Importance of your advisory team. If the business owner were to address all of these issues by himself/herself, there would be very little time to run the business. Plus, these are complicated issues that need to be completed properly. That is the reason why the successful business owner engages the services of an advisory team with the appropriate expertise. Interestingly, studies show that highly successful business owners build their advisory teams early on and do not wait for last minute crisis management.
Stress-testing our assumptions about how we are running the business is a way of analyzing how and why we do what we do. Ultimately, stress-testing leads to new opportunities for improvement in many different areas of our financial lives.
Richard Foy is a Certified Financial Planner with Cochrane Wealth Management of Raymond James Ltd. Richard can be reached at [email protected] or 403 851-0488 with your comments or ideas.
