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Understanding Your Personal Earning Potential When You are Starting a Small Business

Alberta is a province that is ripe with potential for small business owners to build their companies and their future.  As a province, we have a higher than average family income than the rest of Canadians, sitting at $100,750 per household compared to $78,870 per household, the national average (source: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108a-eng.htm). This additional household income means more flexibility regarding saved capital for starting a small business but can also mean a larger discrepancy between your take-home pay as an employee and what you can expect to earn in the early years as a small business owner.

When you are trying to plan for your future, it is imperative to consider your financial well-being and earning potential, both in the short term and in the long term. How can you know how much to invest in real estate, stock portfolios or ancillary spending if you do not have any idea of how much your earning potential will be?

If you are considering starting your own small business, evaluating the realities of your earning potential is not only a smart business decision, it is an important life-planning decision. At Kent Accounting, we help prospective business owners thoroughly evaluate the potential of their business and, not only assist them in deciding if starting a business is the right decision, but help them map out a plan for financial success.


What is the earning potential of owning your own business?

It is no secret that in the early days of your small business, you might struggle with consistent client acquisition and cash flow. The average new small business takes 3 – 5 years to “get off the ground,” and often entrepreneurs work for “free” for the first 1 – 2 years, before they begin to take home a regular pay cheque. While there are certainly some startups that do well right out of the gate (such as restaurants or other franchises), your household income might fluctuate from where it was before you started your small business. As an individual, the best way to balance this out in both the short and long term is through tax deductions.

The tax benefits of being a small business owner are much greater than that of an employee. Income tax is the single largest expenditure a person will make in their life (even more than their home!). When a business earns $100 in income, it pays roughly $13 in tax and, therefore, keeps $87 dollars to either reinvest into the company or to pay out as dividends.  When an employee earns $100, they pay roughly $35 in tax and keep $65 to invest (please note, there are numerous assumptions being made here). As you can see, the after-tax profits are $22 higher for the business vs the employee in the example given.  Simply put, a business can earn more after tax than an employee.  As you build your business, bear in mind that a smart small business accountant will help you understand all the tax deductions available to you as a small business owner, as well as how to take advantage of those after-tax profits.

But we haven’t even gotten to the best part yet.  In addition to receiving better tax rates throughout your earning years, when it’s time to retire you can sell your small business.  When an employee retires, they typically get nothing extra from the company; they simply stop working.  The cash injection from a small business sale in the later years of one’s life can prove very beneficial in funding an enjoyable retirement.  Furthermore, if you are selling a Canadian small business you can receive up to $835,716 tax free (note: there are many restrictions on what qualifies; ensure you seek a qualified small business accountant).  In my opinion, this is the single best tax deduction available to Canadians; you should take advantage of it!

Keeping accurate, detailed financial records is critical for future sales potential – at Kent Accounting, we are happy to help you map out a record keeping plan that, if kept up to date, will save you hours of work and headaches if you choose to sell your business at some point in time.

So what should you do with those after-tax profits? To maximize the growth potential of your income, we recommend flipping that income to a secondary venture and allowing it to grow alongside your business, increasing your cash flow and earning potential. Feel free to connect with us at Kent Accounting to talk about what those new ventures could be and whether taking a passive or active role is best for you.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.

Kent Greaves No Comments

What Is the Difference Between Owning Your Company Vs Being an Employee?

When people are deciding whether they want to take the leap and become a small business owner, often they are more concerned with the personal pros and cons, and less the strategic financial and business concerns. Questions like, how will it affect my personal time? and do I have what it takes? are valid, but these questions are just a small part of the equation when it comes to making the decision about becoming a small business owner.

Before you make that decision, a consultation with a small business accountant like Kent Accounting can go a long way (and we offer these at no charge!). Consider it more of an educational session that will help you see and understand the full picture of owning your own business, both in the short-term and in the long-term. Here are some of the top benefits and challenges to consider when you are thinking about starting out on your own.


Benefits

There are plenty of enticing reasons to become a small business owner – here are just a few.

Freedom to Work from Wherever You Want

Regardless of whether you obtain space for your business or decide to start from your home, as an entrepreneur you get to work where you want to.  Coffee shops, your comfy chair – even the local pub can become your office. If you have a dedicated office space within your home, you can consider that square footage tax deductible, as well as some of your utilities and monthly bills. To best understand what qualifies as a deduction and what doesn’t, contact Kent Accounting.

Results and Gratification

The saying goes “Work Smarter, Not Harder.” Moreover, when you are a small business owner, the more you work, the higher your financial and personal return on investment will be. The success of your business is a direct result of the amount of energy and intellect you put into it. As an employee, success is more likely to be attributed to a team, and you might not directly benefit from your efforts. We have all experienced the fatigue of working in an underperforming team where we have equal share in the reward but end up completing the majority of the work ourselves.

Building A Company Is an Investment

When you build a successful small business, you also have the flexibility to sell your business after it has become profitable and well-established. The sale of your business can be a useful lump sum to help fund your retirement or a new venture you are passionate about. Building a successful small business starts from the beginning. Start with a strong financial plan developed with Kent Accounting.

Job Satisfaction

When you’re employed by a large company, sometimes you feel like just a number. You spend hours working, and yet the majority of the rewards go to executives and/or shareholders. Working for yourself is infinitely more satisfying – the hours of hard work and relationship building pay off exponentially when, as a small business owner, you secure a new client or project. With each new partnership secured, you will feel a pride of ownership and increased confidence in your abilities and your decision. Whether it is bookkeeping or long-term financial strategies, Kent Accounting can help keep your job satisfaction high with stress-free financial planning.


Challenges

While it may seem like owning your company is exciting and liberating (both financially and personally), there are some drawbacks that must be considered before taking the next step.

Upfront Costs

There are costs to starting a business that you will have to pay for before you even begin operating. Paying for the physical aspects of starting your business, like leasing space and buying inventory, supplies and computers, can be large investments. If you do not currently have enough capital saved to pay for these upfront expenses, there are avenues to borrow money to fund these startup costs. However, it is important to remember that these funds are borrowed – you do have to pay them back. Contact Kent Accounting to learn more about start-up funding opportunities and the realities of borrowing money to start your business.

Unsteady Pay Cheques

As a small business owner, you are the last person to get paid. Your suppliers, employees, and creditors all have to be paid before you are, so it is not always realistic to expect that your pay cheque will be reliable until you are well established. Even if you have a substantial project or client list, with a steady monthly net income, remember that in Alberta, your customers will often take 90 days to pay an invoice, so your cash flow can become an issue. It can take up to a year for small business owners to start seeing regular pay cheques, and sometimes longer for those pay cheques to be equal to those you might have been receiving as an employee. We recommend that you have at least 6 months living costs saved up in order to keep financial stressors manageable. Kent Accounting can help you build a monthly cash flow spreadsheet to ensure you are netting enough income to pay your bills.

Uncertainty

If uncertainty is an emotion that you are not comfortable with, then starting your company might not be the best decision for you. How would you feel if your company lost $10,000 in a single month and you had to use your savings to cover it? It is normal for a company to have a bad month and lose that much, or more, periodically throughout its operations. As a small business owner, sometimes it can be challenging to see the forest through the trees and balance new client acquisition (i.e. activities that keep new money coming in) with running your business (i.e. activities that get you paid today). You aren’t alone in growing your business – Kent Accounting can help you build a financial strategy to keep the stress of uncertainty at bay.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.