Too many business owners are making financial mistakes that are easy to fix. These common mistakes end up costing them thousands of dollars in the long run when they could’ve easily been avoided.
Jay Gangnes, Founder of Ocean 6 and Certified Financial Planner shares the five financial mistakes he made as a business owner early on in his career.
5 Financial Mistakes to Avoid as a Business Owner
1. Waiting too long to incorporate
I see business owners hold off on incorporating because they think, “I’m not making enough money.” or “I am not at that level yet.”.
What they don’t realize is there are lots of innovative ways to use your corporation that don’t necessarily relate to how much money you make. Incorporating allows you to choose how to pay yourself, implement clever tax-saving strategies, and accumulate wealth faster.
It’s possible that putting off incorporating is costing you money because you’re paying way more tax than you need to.
So don’t put off incorporating for the wrong reasons; you’ll miss out on all the benefits incorporating can have for you.
(Not sure if you should incorporate? Here are some signs it’s time to incorporate your business.)
2. Investing in RSPs
Another mistake I made early on was investing in an RSP because we’ve always been taught it’s the best retirement vehicle.
But for business owners, RSPs are not a tax-efficient tool for retirement.
By investing in an RSP, you’re essentially locking that money away with no access to it. Although it’s worthwhile to get that tax break when you put money into the RSP, you still have to pay tax when you pull the money out.
If you’re still in a high-income bracket at the time of retirement (which is common for business owners because of all the passive income sources you’ve built), you could find yourself giving up to 50% of your RSP to the CRA when you withdraw.
What you want to do instead is leave that money inside your corporation. You can access every dollar and use that money to invest and grow your business.
Don’t invest in RSPs too early if you’re a business owner, leave your money in your corporation and use your corporate structure to get the maximum benefit of tax-deferred growth.
(There are better retirement vehicles for business owners, here’s the problem with RSPs.)
3. Not investing money back into your business and yourself
One of the best investments you can make is into your business and personal development.
This could be growing your team, investing in new systems and infrastructure, or building out your brand. As for investing in yourself, this can be learning new skills, getting a coach, taking care of your body by exercising and eating healthy, or attending a retreat.
Remember, an investment in yourself is also an investment for your business. Nurturing a healthy mind and body benefits your business as well.
Where people often struggle with this is not being able to see an immediate tangible return on that investment, unlike investing in the stock market or real estate where you can see your growth and earnings. The return may not be seen right away, but over time, you’ll notice the long-term impact and success it rewards.
We advise our clients not to lock up money in long-term investments such as RSPs because you want the option to access capital to invest in your business and yourself.
4. Not separating your personal and business finances
In my early year as a business owner, I had trouble separating my finances and my business’ finances. I considered the profits from my business as my money and not the business’.
One of the most important things you can do is separate yourself from your business. Start drawing that separation by paying yourself a consistent salary in the form of dividends every year instead of pulling money from your corporation to spend whenever you want.
(Not sure how to pay yourself if you are incorporated? Learn more about salary vs. dividends.)
Having a separate bank account and credit card dedicated just for your business avoids any complications that come from mixing your business and personal expenses (especially when it’s time to do your taxes).
As soon as you separate the two, you can get clear about your cash flow. It will bring clarity as to where your business stands financially and lay the foundation to build an accurate financial plan for the future.
5. Taking too much money out of your corporation
When your business is doing well, it’s exciting to pay yourself a high salary. But if you don’t need that money, it’s best to leave it in your corporation.
Leaving money in your corporation gives you easy access to capital. You can invest that money inside your corporation and make the most of the tax benefits that come with being incorporated.
We advise you to run any allowable expenses you can through your corporation before moving the money out to your personal account. This prevents you from paying an extra layer of tax.
Getting crystal clear on your goals helps you decide how much money to take out of your corporation.
For example, someone whose main goal is to save for retirement will want to withdraw with a different strategy than someone whose goal is to purchase an investment property.
(Here are five ways to invest and save taxes by leaving the money in your corporation.)
Avoid These Financial Mistakes by Being Proactive
Once I learned where I stood financially both for my business and personally, it was a huge weight off my shoulder. I was able to spend more time on the things I love rather than worrying about my finances.
Nobody starts a business knowing all the right decisions to make; we’re all bound to make financial mistakes as we get used to new ways of working. But, it’s better to get your corporate structure set up correctly from the beginning to proactively prevent these mistakes in the future.
Being proactive can simply mean spending a couple of hours creating a cash flow plan or if you want to get down to business and organize your entire financial future, book a call today.
We’d be happy to help guide you towards the right financial decisions as a business owner and maximize the use of your corporation.