Business Wealth Watch
As a small-business owner, you’re in a different situation when it comes to money. Because your personal income is closely tied to your business finances, you have to be more careful when making the most efficient use of your hard-earned money.
If one of your goals is to be smarter about your personal and business finances, here are 10 common investing mistakes many small-business owners should try to avoid:
1. Paying too much tax. Many incorporated business owners making less than $500,000 annually don’t realize that they can restructure their compensation so that they pay less tax. They’re often better off paying themselves in dividends rather than salary, which also allows them to opt out of CPP. This translates to more money in your pocket that can be invested.
2. Not being diversified enough. Too many business owners are focused on reinvesting too much of their money back into their business.
The wise ones have money strategically invested and sheltered outside their business. Consider a self-imposed savings program where you take money out of your operating company to keep safe in a tax-efficient account where it can be invested and grow independently.
Small-business owners also make the mistake of investing too much of their portfolio in the same industry in which they work. For example, if you own a jewelry store, you might not want to buy a lot of precious metal funds in your portfolio. If gold goes down, your inventories and portfolios suffer at the same time.
3. Following conventional financial-planning strategies. Adhering to traditional financial-planning methods and investment strategies isn’t a bad idea, but it hasn’t necessarily worked well for a lot of business owners in the last decade. Consider proven ways to grow a substantial nest egg without the risk or volatility of stocks, mutual funds and other conventional investments. A highly diversified portfolio made up of cash-flow investments – that are not tied to the stock market – is guaranteed to deliver better returns every year.
4. Not demanding transparent reporting from financial advisers. Most financial-product companies don’t clearly disclose their fees so many investors aren’t unaware of all the fees they’re paying. If your financial adviser is unwilling to disclose all fees to you, particularly after you’ve made a request, consider finding a new one.
5. Permitting key advisers to operate in silos. A business owner’s advisers (lawyer, accountant, insurance professionals, financial adviser) should communicate annually to collectively review their client’s big-picture interests. The best way to achieve this is to assign a “driver” to ensure your business advisers are on the same page and maximizing value efficiently and profitably for your business.
6. Not maximizing the perks of incorporation. Incorporated individuals can employ some innovative income solutions. For example, they can establish a trust, which costs about $1,500 to setup. It’s flexible and can be used as a financial planning tool for different situations throughout a business owner’s life such as income splitting with your spouse or low-income retired parents.
Tax savings in “ideal” scenarios for high-net-worth individuals could be significant and efficient, particularly if a business owner uses a trust to get funds from a small-business tax environment (where the tax rates are very low) and into low-income hands without the funds being taxed in the business owner’s hands.
7. Being an emotional investor. While “buy, hold and prosper” isn’t always the answer, business owners tend to lean too far the other way. According to the annual Dalbar “Quantitative Analysis of Investor Behaviour” study, for the past 16 years the average investor may have underperformed equity markets by as much as 5% annually as a result of emotional trading instead of investment decisions.
8. Growing without a succession plan. Entrepreneurs tend to be the focal point of their company, but most fail to (or perhaps refuse to) recognize that the business must continue to grow after their involvement. Develop a proper succession plan that not only transitions your business, but prepares you financially for retirement or a reduced role.
9. Not having sufficient risk protection. Business owners rely on their company for income and, in turn, the company often relies on the owner to operate and thrive. But what happens to the business – and the business owner’s family – if a tragedy should prevent you or a key partner from working? Make sure you have the right insurance to protect your interests; it is important to understand how being a business owner affects your business and your family.
10. Separating charitable giving from investment planning. Business owners in a position to generously give back to their community don’t recognize their gifts are a potential investment planning option. Think about implementing structures such as donor-advised accounts as a financial solution that not only lets you give more effectively, but also creates a lasting legacy.
Building a successful business involves long hours and sweat equity.
Don’t let the lack of a well-thought-out plan undermine a whole year of hard work. Take the time to look at your financial goals so you avoid these common mistakes and make the right decisions.