Dear Fellow Entrepreneurs,
Growing your business or ‘selling more’ won’t save you forever. There comes a time when slowing down, thinking it through, exercising constraint and - wait for it - planning financially will get you leaps and bounds ahead of where you are.
When you are a teacher, production accountant, or nurse, there is very little that you can do to affect your financial future outside of spending less, saving, and investing more. Our T4’d friends have a much more consistent path ahead; regular pay cheques, company matched pension contributions, and for some, even scheduled raises. Planning for those folks is almost all science, no art.
If you are an entrepreneur or ‘eat what you kill’ for income, that is not the case. Let’s call it ‘‘heavy art with a science foundation”.
It can feel tough to stop sometimes. If you stop selling or building, things might fall apart, am I right?
Here are a few things that you should be considering to ease the mental load.
Cash on hand
You will NEVER regret having more cash on hand. A universally accepted rule in the financial planning space is to have three to six months of emergency savings on hand; money in a high interest savings account (HISA) that you can fall back on if something goes wrong.
My recommendation is that you have six months on hand IN your business as well as personally, effectively doubling your safety net. So much can go wrong and having cash to fall back on will provide you with the stability to make the decisions that need to be made.
Have you ever tried to think clearly with a mortgage payment pending, zero dollars in your account, and ‘more than enough’ in accounts receivable that “should” make it in time? Anxiety level 100! Avoid that by having more cash than you think you will need.
Invest your money
I meet with a lot of business owners that have small fortunes in their business banking accounts; money that they don’t need for operations and has seemingly piled up by accident. They have kept their head down, focused on building their business, and accidentally accumulated a few hundred thousand. Oops.
You can open investment accounts for your corporations. You don’t have to take the money out of your corporation (and trigger dividends or salary events), effectively growing your money IN your corporation. That money can be invested in anything that you want: stocks, bonds, ETFs, HISA, or funds. It depends on your risk tolerance and goals, personally and with your corporation. A good rule of thumb is if you have more money in your bank account than your business could possibly use in six months, consider putting that money to use and growing your business’ wealth. When your money starts creating ‘revenue’ for you, you start winning and can start thinking about not working.
Pay yourself enough…but not too much
Applying for a mortgage can be a real pain if you are a business owner - if you know, you know! I have clients with considerable wealth who are in their early 40s. Knowing how much money they have in their businesses, I was floored to hear they had a tough time getting a mortgage. They had properly sheltered their wealth in their corporations for years, but the banks didn’t care when it was time for them to personally buy their lakeside second home. They had enough money in their corporation that they could have paid for the cottage twice over with cash - didn’t matter.
A particular couple has resigned to paying themselves about $250,000 each per year just to maintain flexibility personally. Not everyone is in their shoes, not everyone’s business makes that much money, but I would encourage you to think about the role of credit in your life. Banks tend to suck at using logic here, so don’t count on them to understand your situation as well as you do.
Generally speaking, having credit and not having to use said credit is the winning formula. When you need credit, it is very tough to get it. I don’t love or promote the idea of using credit for investing, but it is a good tool to have in the toolbox.
Utilize your RRSP and TFSA accounts
I hate the idea of paying more tax intentionally just to build credit, but contributing to your RRSP and TFSA accounts are never a bad thing.
When you pay yourself from your corporation and contribute to your RRSP account, it’s like the payment never happened. You won’t be taxed on that money until you take it out, which can start as late as age 72. In the meantime - tax sheltered growth - making them very useful tools in retirement planning.
Tax Free Savings Account (TFSA) contributions are made with after-tax personal dollars; you pay yourself from your company, pay the personal tax on it, and contribute to your TFSA account to be invested.
Yes, paying taxes is undesirable, BUT…building up your TFSA remains my favourite account to invest in, full stop. You get the same tax-sheltered growth as a RRSP, but you are never taxed on what you take out of it. Side note: when you die, your TFSA transfers to your spouse or beneficiaries tax-free, making it the best possible estate planning tool out there.
Building up your personal assets while simultaneously building your business will go a long way in taking the stress off your business. When you don’t ‘feel poor’, you can see your financial picture clearer, having a good nest egg built up personally helps.
Prepared and structured for sale
If your Universal Shareholder Agreement (USA) is out of date, if you don’t have one, or you have no clue what it is, I strongly encourage you to book an hour with your lawyer to discuss.
The best time to properly structure your company for future sale is the day you created the company, the second best time is today. You’ll clarify:
- Who owns what?
- What happens if one partner dies?
- How do you retire shareholders; who buys their shares?
- How does the spouse of a deceased partner get bought out?
- Do all partners have holding companies?
When the value of your company is effectively zero, these are easy decisions to make and have little to no outcome on your wealth or tax bill. Ten years in, when the company is worth $10,000,000, is a different story; not a fun one either.
However, ten years out is way better than twenty years out - when the company is worth $40,000,000. You can’t avoid these conversations; you can only plan for them as early as possible. If you’re just starting your business, I implore you to hire a lawyer. It will cost you around $1,500 and feel like overkill for something you can do yourself at the registry, but I promise that ‘future you’ will be extremely thankful you did. Stop building, stop growing, and slow down for just long enough to sit with a lawyer, talk to your partners and your family and make sure your paperwork is in line.
Engage with your team
No one teaches you how to work with your accountant, investment advisor, or lawyer. You hire them because you know you should, but you only really talk to them when they want to talk to you. It was only about a year ago that I started to engage my accountant and ask proactive questions. It turns out he and his team are really smart AND willing to help me with my ‘dumb questions.’
If you are a solopreneur, have a small team, or just prefer not to spill all the tea with your team, engaging the professionals around you that are already being compensated to serve you can be a great sounding board. Tax savings, revenue realization planning, and ease of filing are three benefits that have come from me engaging my team.
Please stop chasing revenue
The last thing that I will say is advice that I wish I gave myself ten years ago. More revenue will not solve all your problems; you need to get your lifestyle in control.
Read that again, get your lifestyle in control!
I went from a solid and stable $170,000/year to a $23,000 wild ride in my first year on my own. However, my lifestyle never changed. I spent above my income for years because I knew that I could (and would) always make more. Deadlines, financial targets, and purchases are great motivators. If you are lucky enough to be able to control your income, you can gather wealth faster than any of your employed peers ever can.
What I have learned through this experience is that these things don’t have to be the motivators, you can work just as hard and accomplish wonderful things without elevated blood pressure and sleepless nights. By all reasonable measures, we have made it through the storm and are reaping the benefits on the other side, but I wouldn’t do it the same again. I should have taken five years, maybe six or seven, to accomplish the same things.
