Eating better and exercising more are likely to be on your list of New Year’s resolutions, but what will you do to improve your financial lot in 2004? Resolve to take these five steps today to earn big dividends tomorrow:
1 Complete a financial plan
Most entrepreneurs don’t have a written financial plan, says John Nicola, president of Nicola Financial Group, a Vancouver-based financial advisor to high net-worth individuals. “It’s not quite as bad as their keeping everything in a shoebox,” he says, “but most don’t have an accurate picture of their overall finances and have no idea where their wealth is generated.” That makes it difficult to determine what your financial situation is. Start by completing a current net worth statement, which summarizes your current postion in terms of all your assets and liabilities. You’ll also need to think about your life goals. Knowing what you want to achieve will help you develop an investment strategy for achieving those goals.
2 Determine the best way to take compensation
Traditional wisdom says entrepreneurs should be compensated with salary in order to maximize their RSP and CPP contributions. But that may not always be the best strategy, says Nicola. Drawing compensation through dividends, essentially a distribution of the company’s profit to shareholders, or even a salary / dividend mix, may benefit you more in the long-term. Still, it’s not a straightforward decision, and every situation is different. Ask your financial advisor to review your current compensation arrangement and to determine your best strategy.
3 Investigate a corporate retirement vehicle
Investing in RSPs alone probably won’t give you the funds you need to retire comfortably. Top up your holdings with an individual pension plan (IPP) or retirement compensation arrangement (RCA), says David Trahair, a CA and consultant who specializes in financial management for small businesses. These vehicles are flexible, unregistered pension plans set up by a firm for an employee or owner. They carry no restrictions on the investments you can make or the amount you can invest. Plus, both these vehicles allow you to defer tax at a higher rate than RSPs.
4 Plan your exit strategy
It’s difficult to think about leaving your company when you’re focused on growth. But even if you’re years away from cashing out of your firm, a formal exit strategy will allow you to leave on your own terms. Think about when and how you’ll leave the business. Do you intend to you pass it on to family or sell to partners or a third party? Other considerations are how you’ll structure the transition and how to finance it.
5 Review your portfolio at least once a year
It’s easy to put portfolio maintenance on the back burner, but the economy and your life circumstances continually change. Resolve to review your returns and objectives annually. Nicola recommends entrepreneurs consider all of their assets including the business, non-registered investments and a spouse’s investments. One rule of thumb: the more net worth that’s tied up in your firm, the less risky the rest of your investment portfolio should be.
Keep advisers honest
Busy entrepreneurs often rely on their broker or adviser when it comes to investment decisions, says David Trahair, a CA and consultant who specializes in financial management for small businesses. And that’s a mistake. Don’t be a passive participant, he says. Take the time to educate yourself. Read the financial statements and review the business model and past performance of the companies your adviser recommends. Says Trahair: “At the very least, you should be able to have intelligent discussions about his or her recommendations.” JM