Most entrepreneurs would prefer focusing on their strengths in running their business. However, the finance side may sometimes be neglected. It is of great importance to have a process for the financial side of your business. Entrepreneurs who understand this and the numbers may maximize earnings, provide for their family and have a secure financial future. By dedicating some time to your finances each month you will improve your business, reduce stress and save unnecessary failure.
Here are five common mistakes that business owners make:
1. Not Paying Yourself First
A growing business is cash hungry and returns on investment are hard to beat anywhere else. It is very tempting to keep all the cash in the company and spend to grow. There is a time tested rule in financial planning that states "you must pay yourself first". From the salary that the entrepreneur takes yearly; it is vital that they save a portion (1/3) and set up proper retirement options. Consider this your back up plan or as we like to say - Personal Pension.
2. Lack of Diversification
It is common practice for entrepreneurs to have nearly all their net worth in the business. This "all your eggs in one basket" approach is a very risky strategy. All businesses have a cycle. When that cycle goes against you, it will be important to have diversified your assets. Real estate, cash, stocks, bonds, collectables, art, private equity, insurance are all part of a well-rounded diversified wealth management strategy.
3. No written plan
How an entrepreneur gets started in business may or may not be the blue print to long term sustained success. Many businesses have failed due to a lack of structure and direction. The old saying goes "fail to plan, plan to fail". Once a year the entrepreneur would be well served to sit down and write goals and targets for the next one, five and even ten years. Topics should include sales, finances, operations and savings.
3. Reluctance to pay for professional advice
Cash flow in the early days of a business can be tight. But as it grows so do the complexities of managing a successful business. The successful entrepreneur engages expert advice as they grow in order to keep on top of ever more expanding responsibilities. An accounting, legal and finance team is a valuable partner for a growing business.
5. Mixing business and personal finances
Entrepreneurs often incur personal expenses that are also business expenses in day to day operations. It becomes very easy to mix personal and business finances. There are however good reasons to keep them separate. Understanding how your business is doing from a financial perspective becomes difficult and confusing. Accounting and tax reporting is unnecessarily complex and may lead to penalties if an audit is applied. Showing little to no income over time may also limit an owner’s ability to borrow and establish a value for business succession.
Other articles that may be of interest to you…
- Personal Tax Strategies
- Interest Deductibility
- Income Splitting Opportunities
- Corporate Tax Structures
Andersen Midgley Wealth Counsel at Richardson GMP is a family office which partners with business owners, executives and professionals across Canada and the United States to manage, optimize and protect multi-generational wealth.
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