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The value of personal financial planning for entrepreneurs

As an entrepreneur, your business is more than just a means of income—it’s a labour of love, a testament to your vision and hard work.

But amidst the hustle and bustle of running a business, it’s easy to overlook your personal financial well-being.

That’s where a qualified personal financial planner who works with business owners can be very valuable. We work with business owners to create a comprehensive holistic financial plan that outlines how they will achieve key financial goals like retirement and leaving a legacy for their loved ones. This type of plan addresses tax planning, investment planning, risk management and estate planning.

In this blog article, the first of a series, we’ll explore the critical role of comprehensive financial planning at various stages of your entrepreneurial journey. From sole proprietorship to successful business transition, let’s delve into the strategies that can safeguard your financial future.

Stage 1: Sole proprietorship – Understanding the landscape

At the outset, as a sole proprietor, your personal and business finances are closely intertwined. A personal financial planner can help you navigate this delicate balance. Here’s what to consider:

1. Emergency fund: Consider establishing an emergency fund to cover unexpected expenses. Aim for at least three to six months’ worth of living expenses. This fund acts as a safety net for both your personal life and your business.

2. Tax optimization: Understand the tax implications of your business structure. A qualified financial planner can guide you on tax-efficient strategies, ensuring you maximize deductions while complying with legal requirements. You will probably also be looking for professional accounting advice and ensure that you are meeting all of your tax filing requirements.

3. Retirement savings: Consider contributing to your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). These accounts offer tax advantages and help you build a nest egg for the future. We sometimes recommend starting with the TFSA until your business reaches an income level that bumps you into a tax bracket that makes the RRSP contribution more valuable.

4. Personal risk management: Does your family rely on your business income to meet basic needs? What happens to your income if you are unable to work? In our practice we conduct a needs analysis for all clients to insure that they and their family are covered in case of premature death or disability.

Financial strategies

• Business expenses: Keep good records of business expenses. Proper expense tracking ensures accurate tax reporting and helps you maximize deductions. Set up separate bank accounts and credit cards for managing your business.
• Debt management: If you’ve taken on business loans or credit, develop a plan to manage debt effectively.

Many businesses do not grow past the sole proprietor stage or maintain this structure for many years. It’s important to ensure that you start planning for a future beyond the business while in this stage. A successful sole proprietor has many financial decisions and planning opportunities to consider in the development of a comprehensive financial plan.

Stage 2: Growing business ready to incorporate – Navigating incorporation

As your business expands, incorporation becomes a strategic move. Here are a few ideas on how a financial planner can assist:

1. Tax efficiency: Understand the tax benefits of incorporation. Corporations have lower tax rates, and you can defer personal income by leaving profits in the company. A comprehensive financial plan can model the benefits of incorporation over multiple periods of time.

2. Salary vs. dividends: Your accountant and financial planner can guide you on the optimal mix of salary and dividends. This decision affects both your personal income and retirement savings.

3. Investment strategies: Explore investment options within the corporation. Different types of investments are taxed in different ways within a corporation. In our practice, portfolio design is customized to ensure that your investment strategies make sense whether inside the corporation or investments held personally including RRSPs and TFSAs.

Financial strategies

• Retirement planning: Develop a comprehensive retirement plan. Estimate retirement expenses, optimize government benefits, and create a diversified investment portfolio.
• Risk management: Assess risks specific to your industry. Consider insurance coverage for business continuity and personal protection.

Stage 3: Established incorporated business – Wealth management and growth

Now that your business is established and incorporated, a financial planner can help you manage your growing wealth. Consider the following strategies:

1. Retirement goals: Fine-tune your retirement goals. A financial planner can help you strike a balance between reinvesting in the business and securing your personal future. Some business owners may benefit from the creation of an Individual Pension Plan (IPP). We model the different options within the financial plan to see what makes sense for your situation.

2. Estate planning: Plan for the transfer of wealth to your heirs. A will, power of attorney, and trusts are essential components of estate planning. Corporate owned permanent life insurance can also be a powerful tax and estate planning tool in the right circumstances.

3. Business valuation: Understand the value of your business. A valuation can help you assess its worth and explore exit strategies. The valuation of your business may become an important element of your comprehensive financial plan. We will explore the topic of business valuation in more depth in future blog articles.

Financial strategies

• Tax optimization: Continuously review your tax strategies. Take advantage of available tax credits and deductions.
• Investment diversification: Diversify your investment portfolio beyond the business. Explore equities, fixed income, real estate, and other asset classes.

Stage 4: Successful incorporated business ready for transition – Transitioning with confidence

When you’re ready to sell your business or transition to retirement, a financial planner is invaluable. In our practice we always work with your other professional advisors to ensure a favourable outcome for you. Topics include:

1. Exit strategy: Work with an experienced financial planner to review your detailed exit plan and co-ordinate with your comprehensive personal financial plan. Key variables include the timing of the sale, minimizing taxes, and ensuring a smooth transition.

2. Succession planning: If passing the business to a family member or partner, plan for a seamless transition. Consider training and mentorship.

3. Retirement income planning: Business Owners often have a variety of different potential income sources to fund their desired retirement lifestyle. Personally held investments include RRSPs, TFSAs, and non-registered assets.

There are government programs like OAS and CPP which may or may not make a meaningful contribution. There are often assets that are still held corporately even if the business has been sold. What is the optimal mix and timing of drawing on these different sources, and will it be enough to fund your desired lifestyle?

4. Estate and legacy planning: Ensure your wealth is distributed according to your wishes. Working with your other important advisors, a qualified financial planner can help you structure your estate efficiently.

When you’re ready to sell your business or transition to retirement, quality financial planning advice is invaluable. We can help you plan for this transition, ensuring you have the funds you need to retire comfortably.

In the upcoming articles, we will delve deeper into topics like succession planning, essential considerations when selling your business, and how to value your business.

These articles will provide more detailed information on these complex topics.

But for now, remember that a qualified personal financial planner is not just a luxury—it’s a necessity for any serious entrepreneur. Financial planning is not just about numbers—it’s about your life, your goals, and your dreams. A good financial planner understands this. They take the time to understand you, your business, and your goals. They use this understanding to provide personalized advice and strategies.

So, whether you’re just starting out as a sole proprietor, or you’re ready to sell your successful incorporated business, a personal financial planner can add significant value.

Remember, the journey of entrepreneurship is a long one, and it’s not one you have to walk alone. A qualified and knowledgeable financial planner can walk with you, providing the advice and support you need to ensure your financial success and peace of mind.

Stay tuned for our next article, “The importance of succession planning,” where we will explore how to ensure your business’s success continues, even after you’ve stepped down.

Steve Gobel & Kevin Sampson are wealth advisors with over 30 years’ experience each in the financial planning advisory area.

They use their extensive knowledge in the areas of Retirement, Investment, Tax and Estate Planning to develop comprehensive financial plans for business owners and professionals that help them achieve their financial goals. Discover how we can help unlock your company’s potential.

Steve Gobel CFP RFP RRC CEA TEP, executive financial consultant
Kevin Sampson CFP RRC CEA, senior financial consultant
Investors Group Financial Services Inc.

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities.

Steve Gobel & Kevin Sampson are solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant