Family-owned enterprises make up about 80 per cent of Canada's businesses and employ 50 to 60 per cent of our workforce. But while they're the engine of our economy, they tend to overlook an essential element of success.
"Business owners have a tendency to invest all of their time, energy and financial assets into their business and neglect the personal side of the equation," says Lee Anne Davies, head of retirement strategies, RBC.
While that may be inevitable during the start-up phase of a business, addressing the imbalance as soon as possible reduces overall risk, increasing peace of mind. "Business owners usually have a written business plan in place - creating a written financial plan can help ensure that decisions are made with both aspects of life in appropriate perspective."
In surveys, business owners and the self-employed often say they have no plans to retire, says Ms. Davies. "While that may be an option for some, personal financial planning can provide important strategies for plan B: what happens if failing health means you can no longer work? What happens to your family if a weak economy results in a business crisis? It's not just about retiring, but about managing risk."
Business owners are also likely to have all of their investment assets "in one basket" - their business. "Diversification is essential to risk reduction, and it doesn't have to mean that those assets aren't available for capital deployment in the business," she advises. "Many of our clients use their personal investments as leverage for business borrowing."
"I always advise my clients to make their maximum RRSP contribution each year; they often tell me that they could be earning much more if they invested that money in their business," says Colleen Gibb, FCA. "But it is so important to diversify all of your family's assets. And RRSP contributions help with personal tax planning, as well."
As time is a constant challenge for entrepreneurs, identifying the right advisory team can be the first step to achieving new levels of success in both the business and personal realm. "Start by strengthening your circle of advisors to include people who can advise you on your personal finances as well as on your business," says Ms. Davies.
Effective communication with your advisory team is critical, says Ms. Gibb. "Find advisors you're comfortable asking questions of, and who provide answers you understand. It's important to interview people to ensure they're on the same page as you. If you're very conservative, for example, you don't want an aggressive financial planner."
Clear, trusted advice can be essential, because it's very easy for business owners to lose objectivity about their business, she says. "Their business becomes who they are. In the economic downturn we just experienced, I've seen situations in which individuals had to ask themselves how indebted they will make their family, or whether they could be making more of a profit in a GIC, when their business has been their life goal. It's a tough call."
As difficult as that decision may be, it is a lot harder for individuals who haven't diversified and put a personal financial plan in place. "Your business is a risky investment, and it is essential to have more conservative investments as well," says Ms. Gibb.
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While the RRSP continues to be Canada's primary tax shelter for retirement savings, the TFSA offers new options for the self-employed. "When we ask people what they are using the TFSA for, the responses range from long-term goals such as retirement savings to shorter-term goals such as saving for a car. But business owners are more likely to use the TFSA as an emergency fund. It offers more flexibility without creating tax consequences on the personal side," says Lee Anne Davies, head of retirement strategies, RBC.
For more information, please visit www.rbcroyalbank.com/tfsa.