A Guide to Financial Planning for Business Owners and Entrepreneurs

Tips for Entrepreneurs and Business Owners

Written by John Woodfield, Portfolio Manager, CIM® CFP®

If you’re a business owner or entrepreneur, it’s important to make sure you’re doing financial planning for yourself and your business. It’s common for business owners to have most of their net worth tied up in their business. But diversification is important for everyone—even business owners!

This article offers valuable advice and strategies for entrepreneurs and business owners. Discover the best practices designed to help you excel in today’s competitive market and achieve sustainable growth and financial success.

TABLE OF CONTENTS

1. Why Personal Financial Planning Is Important for Business Owners and Entrepreneurs
2. Financial Planning vs. Investment Management: What's the Difference?
3. Your Business Financial Plan vs. Your Personal Financial Plan
4. 7 Essential Financial Planning Steps for Business Owners and Entrepreneurs
5. Retirement Planning for Small Business Owners and Entrepreneurs
6. 8 Reasons Why Business Owners Should Work With a Financial Advisor
7. Estate Planning for Business Owners
8. Succession Planning Tips for Business Owners
9. Common Financial Planning Mistakes Business Owners Make
10. How To Put Together Your Wealth Management Team
11. How To Find a Financial Advisor if You’re a Small Business Owner or Entrepreneur
12. Common Questions About Financial Planning and Wealth Management

Why Personal Financial Planning Is Important for Business Owners and Entrepreneurs

Financial planning is crucial for business owners and entrepreneurs as professional planning ensures the success and growth of a business, providing a solid foundation for achieving financial goals.

Financial planning and investment management are two distinct but interconnected aspects of overall financial management. Here's a breakdown of the differences between the two:

Financial Planning vs. Investment Management: What's the Difference?

The processes of financial planning and investment management are closely related.

Financial planning is a comprehensive process that assesses an individual's or a business's current financial situation and establishes goals while creating a roadmap to achieve those goals.

The key components of financial planning typically include:

• Assessing the current financial situation
• Establishing goals and objectives
• Managing budgets and cash flow
• Optimizing and planning for taxes
• Managing risks through insurance planning
• Planning for retirement and business succession

On the other hand, investment management focuses on optimizing and managing investments within client portfolios.

This entails selecting suitable investments, monitoring their performance, and making adjustments as needed. The objective is to achieve desired investment returns while minimizing risks according to the investment policy document tailored to the client's specific goals.

The main elements of an investment management strategy usually include:

• Setting objectives and assessing risk tolerance
• Developing asset allocation strategies
• Selecting specific investments
• Monitoring, adjusting, and rebalancing the portfolio
• Evaluating the effectiveness of the strategy and providing reports

Your Business Financial Plan vs. Your Personal Financial Plan

The distinctions between a business financial plan and a personal financial plan primarily lie in their focus and components. A business financial plan serves as a roadmap for the success of the business. It centres around the financial goals, strategies, and projections specific to the business.

In contrast, a personal financial plan is geared towards individual or family goals and aspirations. Its purpose is to achieve personal financial stability. These plans encompass personal financial goals, strategies for managing risks, tax efficiency planning, and succession planning.

7 Essential Financial Planning Steps for Business Owners and Entrepreneurs

1. Establish clear financial goals: Define the financial objectives for your business, including projected revenue, profits, and important milestones to strive for.
2. Assess your current financial situation: Take stock of your business's assets, revenue, and expenses. This evaluation forms the foundation for a comprehensive financial plan.
3. Develop a budget and cash flow plan: Outline your expected income and expenses, including fixed costs, to create a realistic budget. This plan helps you manage your cash flow effectively.
4. Implement effective tax planning strategies: Familiarize yourself with the intricacies of business taxation, credits, and potential incentives. Develop strategies to optimize your tax situation.
5. Establish risk management measures: Identify potential risks to your business and devise strategies to mitigate them. Insurance coverage, emergency funds, and careful planning can help protect against unexpected events.
6. Create an investment strategy: Diversify your funds beyond your core business by developing an investment strategy. Seek guidance from a portfolio manager to ensure proper allocation of resources.
7. Set up regular strategy and planning reviews: Financial planning is an ongoing process that requires regular review and updates. Monitor your performance against the plan and make necessary adjustments as needed.

Retirement Planning for Small Business Owners and Entrepreneurs

Retirement planning is vital for small business owners and entrepreneurs to secure their financial future.

Here are some essential steps for retirement planning, specifically tailored to their unique circumstances:

• Start early
• Project retirement income needs
• Assess current retirement savings
• Explore retirement options
• Maximize savings into tax-free and tax deferred plans
• Optimize your investment strategy
• Create a succession planning strategy

8 Reasons Why Business Owners Should Work With a Financial Advisor

Expertise and knowledge:

Financial advisors are professionals with specialized knowledge and expertise in various financial areas, including tax planning, investment strategies, risk management, and retirement planning. They stay up to date on financial trends, regulations, and market conditions to provide informed advice tailored to the specific needs of business owners.

Objective perspective:

As business owners, it can be challenging to remain objective when making financial decisions. A financial advisor offers an unbiased viewpoint and provides objective insights into your business's financial situation. They analyze financial data, identify improvement areas, and offer recommendations based on your goals and risk tolerance.

Time and focus:

Running a business demands significant time and effort, leaving little room for handling financial matters. By partnering with a financial advisor, business owners can delegate financial tasks and concentrate on core business operations. Advisors handle complex financial tasks, conduct research, and provide ongoing monitoring and analysis, freeing up valuable time for business owners.

Customized strategies:

Financial advisors work closely with business owners to understand their unique financial goals, business objectives, and risk tolerance. They develop tailored financial strategies and plans that align with the specific needs of the business, ensuring that decisions are in line with long-term objectives.

Financial planning and coordination:

Financial advisors assist business owners in creating comprehensive financial plans that encompass personal and business finances, retirement planning, tax planning, estate planning, and risk management. They ensure all these components work together seamlessly, providing a holistic approach to financial management.

Networking and resources:

Financial advisors often have extensive networks and connections within the financial industry. They leverage these resources to connect business owners with other professionals, such as accountants, lawyers, and bankers, who can offer specialized assistance and support for specific financial needs.

Accountability and monitoring:

A financial advisor helps business owners stay accountable to their financial goals. They regularly review and monitor the financial plan, track progress, and make adjustments as needed. This ongoing guidance and support ensure that business owners stay on track and make informed financial decisions.

Risk mitigation:

Financial advisors assist business owners in identifying and mitigating financial risks. They analyze potential risks and develop strategies to protect the business and its owners from unforeseen events. Whether it's implementing insurance or diversifying investments, financial advisors provide valuable guidance in managing risk effectively.

Estate Planning for Business Owners

Estate planning is essential for business owners to ensure a seamless transition of their business and assets in case of incapacity or death.

Here are some important steps to consider when it comes to estate planning for business owners:

1. Create a will

Draft a legal document that outlines your wishes for asset distribution after your passing. Business owners should have a will that addresses the transfer of business ownership and specifies who will inherit and manage the business.

2. Establish a power of attorney

Designate a trusted individual to make financial and legal decisions on your behalf, in the event that you become incapacitated. Choose someone knowledgeable about your business who can make critical decisions during your absence.

3. Designate a healthcare proxy

Appoint a healthcare proxy who can make medical decisions on your behalf, if you are unable to do so. Ensure this person understands your preferences regarding medical treatment and end-of-life care.

4. Consider business succession planning

Identify and prepare a successor to take over your business when you retire, become disabled, or pass away. Develop a comprehensive plan that outlines the transfer of ownership, management responsibilities, and addresses potential tax implications.

5. Protect your business with insurance

Evaluate the need for insurance coverage to safeguard your business and family in the event of unforeseen circumstances. Consider life insurance policies that provide financial support to your loved ones and facilitate a smooth transfer of business ownership.

6. Minimize estate taxes

Work with an estate planning attorney or tax professional to develop strategies for reducing estate taxes. This may involve gifting assets during your lifetime, establishing trusts, or taking advantage of tax deductions and exemptions available to business owners.

7. Review and update regularly

Estate planning is not a one-time task. It's crucial to review and update your estate plan regularly, especially during significant life changes like the birth of children, marriage, divorce, or changes in your business or financial situation.

8. Seek professional guidance

Estate planning can be complex, especially for business owners with unique considerations. Consult an experienced estate planning attorney or financial advisor who can offer personalized guidance based on your specific circumstances and help you navigate the legal and financial aspects of estate planning.

Remember, estate planning is vital to protecting your business, assets, and loved ones.

By planning ahead, you can ensure the continuity of your business, proper distribution of assets, and the financial well-being of your family.

Succession Planning Tips for Business Owners

• Start early
• Identify potential successors
• Create a transition plan
• Communicate your intentions with all stakeholders
• Consider potential legal and financial considerations
• Test and adjust the plan
• Document business processes and relationships
• Seek professional guidance

Common Financial Planning Mistakes Business Owners Make

• Mixing personal and business finances
• Creating an inadequate financial plan
• Creating unrealistic revenue or expense projections
• Not having sufficient cash flow
• Improper tax planning
• Taking on too much debt
• Taking on excessive risk
• Not using professional financial advisors
• Failing to plan properly for business continuity (succession/estate planning)

How To Put Together Your Wealth Management Team

As a business owner, building a capable and reliable wealth management team is essential for effectively managing your personal and business finances.

Here are steps to help you assemble your wealth management team:

• Identify your needs and goals
• Seek recommendations or referrals from your network
• Conduct research on potential advisors
• Schedule meetings with potential candidates
• Evaluate professional credentials and designations
• Check references and client reviews
• Look at creating a team from applicants
• Fully understand the fee structure and compensation
• Read and review all contracts

How To Find a Financial Advisor if You’re a Small Business Owner or Entrepreneur

Finding the right financial advisor who understands the specific needs of your small business is crucial for your financial success.

Here are steps designed to help you find the right fit:

• Clarify your needs and goals
• Seek recommendations
• Use the power of the internet to research
• Check the credentials of a potential advisor (CFP, CFA, CPA, etc.)
• Compare cost structures
• Check background and discipline
• Evaluate fit and chemistry

Common Questions About Financial Planning and Wealth Management

1) What is financial planning and why is it important?

Financial planning is the process of setting and achieving financial goals by assessing your current financial situation, developing a comprehensive plan, and implementing strategies to help you reach those goals. It involves analyzing your income, expenses, assets, liabilities, and investments to create a roadmap for your financial future. Financial planning is important because it enables you to make informed decisions, manage your finances effectively, and work towards a secure and prosperous financial future.

2) How can financial planning benefit me as a business owner?

Financial planning offers numerous advantages to business owners.

It helps establish a strong financial foundation for your business by efficiently managing cash flow, allocating resources, and making informed investment choices. It also aids in planning for the growth and expansion of your business, mitigating risks, and optimizing tax strategies.

Moreover, financial planning enables you to set personal financial goals, such as retirement planning, and align them with your business objectives for a comprehensive approach to your financial well-being.

3) What is wealth management and why is it important?

Wealth management is the holistic management of an individual's or family's financial resources, aiming to preserve and enhance their wealth over time. It encompasses multiple facets of financial planning, including investment management, retirement planning, tax planning, estate planning, and risk management.

Wealth management is crucial because it enables individuals and families to achieve their financial goals, safeguard their assets, mitigate risks, and prepare for the future transfer of wealth to future generations.

4) How can a financial advisor help me with wealth management?

A financial advisor can be instrumental in wealth management, offering tailored guidance and expertise based on your unique financial situation and goals. They can assist you in creating a comprehensive wealth management plan, providing advice on investments, and managing your portfolio.

They can also help with retirement planning, optimizing tax strategies, and coordinating estate planning efforts. A financial advisor ensures ongoing monitoring and adjustment of your financial plan, ensuring it stays in line with your evolving circumstances and objectives.

5) How do financial advisors get compensated?

Financial advisors can receive compensation through various methods, depending on their business model and the services they offer. The common forms of compensation include:

• Fee-based: Advisors charge fees based on a percentage of the assets they manage on your behalf. This fee structure is typically used for investment management services.
• Fee-only: Advisors charge a fee for their services, which may be based on an hourly rate, a flat fee, or a retainer. Fee-only advisors do not earn commissions from product sales, which helps minimize potential conflicts of interest.
• Commission-based: Advisors earn commissions by selling financial products, such as insurance policies, mutual funds, or annuities. It's important to be aware of potential conflicts of interest associated with commission-based compensation and ensure that the advisor's recommendations align with your best interests.
• Hybrid model: Some advisors employ a combination of fee-based and commission-based compensation, depending on the services provided and the products recommended.

6) How often should I review my financial plan?

Regularly reviewing your financial plan is crucial to keep it up to date and effective. While the frequency of reviews may vary based on individual circumstances, it is generally recommended to review your financial plan at least once a year. However, it's also important to review it when significant life events take place, such as getting married, having a child, changing careers, or approaching retirement.

Regular reviews allow you to monitor your progress towards your financial goals, make necessary adjustments to your strategies, and adapt to changes in the market or your personal circumstances.

7) Can I handle my own financial planning and wealth management?

While it is possible to handle your own financial planning and wealth management, it requires a solid understanding of personal finance concepts, investment strategies, tax regulations, and other areas of financial management.

Many individuals choose to work with a financial advisor due to the complexity of financial matters, the time required for research and analysis, and the desire for professional guidance.

8) Why is developing a financial plan important for entrepreneurs?

Financial planning is crucial for entrepreneurs as it lays the foundation for their future success and the eventual transition of the business. A well-developed financial plan helps entrepreneurs set clear goals, manage resources effectively, and navigate through financial challenges. It also plays a key role in preparing the business for potential sale or succession planning.

9) Should I invest in real estate or the markets?

It's important to remember that the real estate market is just one of many investment options, alongside stocks and bonds. Diversifying your investments across different asset classes is essential to protect your wealth.

Most financial advisors recommend holding a variety of company shares, bonds, and high-quality real estate properties to achieve a well-rounded investment portfolio.

10) Should I work with an investment manager, portfolio manager, wealth manager, or financial advisor?

The titles can be confusing, and there is a hierarchy of advisory channels in Canada and the U.S. In general, financial advisors undergo training, although some may be limited to using mutual funds and packaged products. Investment managers, portfolio managers, and wealth managers often act as fiduciaries and have access to a broader range of investment options.

Choosing a wealth manager can be tricky.

Read our article about choosing a wealth manager for an overview of what to look for and how to find the right team.

11) Who do I need on my wealth team?

Building a strong wealth team starts with a competent accountant. From there, it is recommended to add a portfolio manager/financial advisor and a lawyer. These three professionals form the initial core of your team, similar to the three legs of a stool. Additional specialists can be added as needed during the process. A financial advisory/portfolio management team can often bring additional resources and expertise to the table.

Summary of Key Points:

• Investment management focuses on optimizing and managing investments within client portfolios.
• Small business owners and entrepreneurs often forget to create a personal financial plan as they are so focused on building their business. But it’s critical to have both a business and personal financial plan.
• A business financial plan serves as a roadmap for the success of the business.
• A personal financial plan is geared towards individual or family goals and aspirations.
• Regular strategy and planning reviews are an important part of maintaining and updating your financial plan.
• It’s important to work with a financial advisor so you can ensure you’re prepared for retirement and sufficiently diversified.
• Your financial advisor will help you manage risk so that you don’t have to be worried about your financial future as you grow your business.

Next Steps

At SWAN Wealth, we work with Canadians and Americans with cross-border wealth. If you’re a Canadian resident or are planning on moving to Canada and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. If you’re a Canadian resident moving to the U.S., please reach out before you move. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management. We’re licensed in Canada and the U.S. with expertise on both sides of the border.

More Financial Planning Articles and Guides

If you’re planning a cross-border move, these articles and guides will help you simplify your move and ensure you’ve covered everything.

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About the Author

John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP), and in 2007, was inducted as a Fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.

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