If you’re a small business owner, it’s likely that you have felt that successfully growing your business is one of the most important things in life. It’s also expected that you have poured quite a bit of your own personal resources into it. For these reasons, it’s crucial to have a strong financial plan so your business can build on a solid foundation.

Having a well-thought-out financial plan when you are your own boss is critical to the long-term viability of your business. Every financial decision you make will have a direct impact on the success of your venture. Whether you are in the early stages of entrepreneurship focusing on creating cash flow, or you have scaled quickly, it’s crucial that you update your financial plan to fit this stage of your life.

If you’re feeling a bit overwhelmed because you’ve heard of the benefits of financial planning (especially when you’re an entrepreneur) but don’t yet know how to better manage your finances, continue reading. We’ll explain how to establish your business priorities that will give you greater control over your company and more peace of mind.

Take stock of your expenses

When you think of your business expenses, you should separate them into two cost categories. Your operating expenses as well as your startup expenses, which include any costs of getting your business up and running. Examples of these include:

Of course, this is just a short sample of startup expenses. You can expect your own list to grow quite quickly as your business takes off.

On the other hand, operating expenses are the costs that are required to keep your business running. The best way to think of these is as your monthly expenses. Operating expenses may include:

  • Salaries (including your own)
  • Rent or mortgage payments
  • Communication expenses (internet, telephone services, etc.)
  • Utilities
  • Storage
  • Distribution
  • Promotion
  • Office supplies
  • General maintenance

Once again, keep in mind this is simply a partial list. After you have listed all of your operating expenses, you will have a total that will reflect the monthly cost of running your business. We recommend multiplying this number by 6, so you have a six-month estimate. If you add this to your startup expenses, you will have a ballpark amount for your total startup costs. Now you can begin to build your financial plan knowing this information.

Establish your emergency savings

Many small business owners have chosen the route of entrepreneurship for the freedom of being their own boss. However, the downside to this is an unpredictable income, especially in the early stages. When bills begin to pile up, it can cause serious difficulties for your financial plan and your business.

We suggest having your emergency fund built and ready before you officially dive into the journey of opening your business. This will allow you to be prepared for the time between just starting out and making a profit. You may have heard the common rule of having 3 months of take-home income saved up, but when you own your own business, it’s recommended to double that and save 6 to 12 months worth of business and personal expenses set aside.

Be sure to carefully monitor your spending patterns and expenditure so you can ensure your hard-earned money is being optimally used.

Obtain a line of credit (LOC)

Next, you should think about obtaining a line of credit for your small business. The motive of this is not to carry a balance, but instead, use it as a tool to smooth out your month-to-month cash flow. An example of this would be paying a bill that is due before you have received payment from a client.

However, be aware of the fact that depending on how early you are in the entrepreneur process, you may have to secure the LOC with your own personal assets, such as your home. Don’t fret, once your business grows and is more established, it will be easier to obtain an unsecured line of credit.

Educate yourself on tax rules for business owners

It’s easy to become overwhelmed when you sit down and think about which taxes apply to you, what can potentially be deducted, and how to file your business taxes correctly while also saving the most amount of money. It’s not a secret that tax season tends to come hand in hand with confusion. Spending a bit of time educating yourself, whether with a professional or not, can make you money through tax breaks and rebates.

When you are a business owner in Canada, there is a wide variety of potential tax deductions that you may be eligible for. These can be used to reduce the amount of income tax you are required to pay, or even to receive a tax refund. In general, anything you are required to spend to run your business successfully can be deducted from your annual taxable income. Even if your business is run from your home office, these deductions could cost the cost of expenses such as:

  • Cell phone bill
  • Internet service
  • Part of your rent or mortgage interest
  • Car lease

Ensure you’re diligent with saving all your business-related receipts. Unfortunately, the Canada Revenue Agency (CRA) does not work on the honour system and requires you to provide receipts and documentation to prove that what you spent was necessary for your business. Keep in mind that if the CRA audits you, proof of receipt is needed going back at least seven years.

Acquire health benefits

If you’ve worked a regular 9 to 5 job in the past, you’re likely familiar with corporate benefits packages. Unfortunately, when you’re self-employed, those benefit packages no longer apply to you. On the bright side, there is an excellent solution known as a Health Spending Account (HSA).

Essentially you take pre-tax earnings from your business and put it into your HSA. The next step is to then withdraw money from this account tax-free to pay for your medical and/or dental expenses. Anything from routine medications to deep-tissue massage sessions can be tax-free perks of your job.

Another benefit to keep in mind is that HSA can be extended to any employees of your company, which is generally more flexible and cost-effective compared to a group benefits package. You will decide how much HSA funds each employee will receive, and they spend it as they like.

Set your goals for retirement

We know that when you’re an entrepreneur, you tend to be more focused on your day-to-day tasks and requirements that are necessary to keep your business running smoothly. It’s a possibility that you may not yet have thought about retirement, and what it will take you to get there. As a small business owner, you don’t have the luxury of a company pension or an employer matched contribution. The responsibility of planning ahead and determining how you will afford to retire is entirely up to you.

For almost all Canadians, two options can help provide a modest level of income in retirement, the Old Age Security (OAS) and the Canada Pension Plan (CPP).  OAS is the simpler of the two and has nothing to do with how much you have worked in your lifetime, your overall earnings, or how much tax you have paid throughout the years. It’s solely based on residency. If you have lived in Canada for 40 years and are between the ages of 18 to 65, we have good news for you! You are eligible for OAS. It’s funded from taxes, and you can begin to collect at age 65.

On the other hand, the amount of CPP you receive in retirement is based on your contribution to the plan. In Canada, anyone between the ages of 18 to 80, annually earning more than $3,500 is required by law to contribute. Regular workers contribute 4.95% of their annual earnings, to a maximum of $2,593.80, with their employer contributing an equal amount. When you’re self-employed, you’re required to contribute both the employee and employer amounts. This comes out to almost 10% of net income, up to an annual maximum contribution of $5,187.60. You will receive a tax deduction for the employer half of your contribution, plus a 15% federal tax credit for the employee portion. Important tip; CPP benefits are available starting from age 60 to 70.

Other ways to plan for your retirement include building up your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Both these tools offer you a tax-advantaged solution throughout your working life to save money for a potentially pension-less retirement.

Work with a team of financial professionals

When you are an entrepreneur, your finances become much more complicated. Having a financial plan is necessary to ensure your business is not only sustainable but also continues to grow and succeed. Here at Planswell, we can help you plan for the future and set you and your venture up for the highest possible success. When you build a financial plan with Planswell, our team can shape your financial future in a way that is needed to achieve both your personal and professional goals.


Guest post by Claudia DoRego, Planswell:

Grow your wealth. Manage your borrowing. Protect your assets. Planswell gives you a free plan that ties investments, insurance and mortgages together so you can maintain your lifestyle throughout work and retirement.