The Five Most Common Financial Planning Mistakes that Entrepreneurs Make and How to Avoid Them

There are two basic rules that pertain to any entrepreneur. First, avoid mistakes and second, never forget rule number one!

Seems fairly straight forward, however, small business owners and professionals often fall prey to unfortunate situations as a result of not having put in place some essential building blocks in their wealth management plans.

When it comes to creating wealth, successful individuals don't focus on factors that they can't control. Rather they choose to focus on avoiding mistakes, the one thing you can control.

By avoiding mistakes, you can benefit from two powerful forces that you can have on your side; First, time, which will let you build wealth slowly and steadily, without taking undue risks. Second, the power of compounding, which gives your portfolio and an enormous boost over time- especially in the latter stages of your investment program. We've all heard the expression "It's the first million that's the hard one." The reason is simple, because the next double creates the next million. Outlined below, are five of the classic entrepreneurial pitfalls that trap the small business owner/professional in their financial planning strategies.

1. Treating investments like a part time job: Any smart entrepreneur knows that you can't run a business by the seat of your pants. You need a carefully thought out thorough business plan that covers both short and long term objectives. In addition, it has to be an integrated, multi-dimensional, holistic plan which encompasses tax, investment and estate planning issues simultaneously. Like any good business plan, a sound financial plan isn't just a document; it is really an ongoing process to be reviewed frequently and modified as required. The plan needs quantifiable goals against which to measure results, along with a clear strategy for attaining the goals.
2. Not setting aside an appropriate amount of time to plan: Any successful entrepreneur knows that business success is the result of hard work. The harder you work the luckier you get- right? All too often there doesn't seem to be enough hours in the day and so the area that invariably suffers is attending to personal details. Then, when you do take some time to tend to personal matters, the ideas are too difficult to assess quickly so you procrastinate or you've left something so long that you react on impulse to get it out of the way. Are you running your business or is your business running you? Successful entrepreneurs know that you need to step away from your busy world periodically to take control of your financial destiny.
3. Needless exposure to risk: Everyday an entrepreneur's business life is exposed to risk. Bad debts, managing cash flow, inventory decisions etc. All too often emotions get involved by chasing last week's hot stock tip and attempting to time the market, propelled by ego or an unquenchable desire to "get rich quick". After all, the safest way to double your money is to fold it over once and put it back into your wallet. Your business life is filled with risk, why have it in your personal life too? When it comes to personal investments, logic must prevail. Every serious investor should have an established asset allocation strategy, which encompasses the balancing of risk and returns, while taking into account your time horizon and future income requirements. The plan must be one that you genuinely believe in and one which you are willing to commit to for the long term. Errors in underestimating how much income you'll need to support your lifestyle or how long the money might have to last must be avoided. For the entrepreneur, an additional consideration is ensuring that personal assets such as RRSP's are creditor-proof also. Avoid taking more changes than necessary.
4. Dealing with investment advisors who do not have relevant business exposure: The essence of any successful entrepreneur is their personal experience in making the right decisions in the most difficult circumstances. Choosing an experienced, proactive versus reactive advisor can make all the difference in the world. No one but the entrepreneur understands the stress of having a line of credit yanked the day before payroll or the pain of being shot in a "shotgun" clause in a shareholders' agreement. Surrounding yourself with competent advisors is the key. Further, choosing an investment advisor who can meet and discuss with other key advisors such as lawyers, accountants and bankers etc. will assist dramatically in minimizing delays in decision making. This is because all of the individuals whose advice you may depend on will be in the same room at the same time. No more conflicting opinions or telephone tag between professionals.
5. No exit strategy for your business/practice integrated into the financial plan: There are only two ways you will exit your business. By choice, in good health through a timely sale, or out of necessity, as a result of poor health and /or death. For most entrepreneurs their business interests represent the most significant portion of their personal asset base. Therefore, having a well thought out, written exit strategy in good or poor health, will go a long way to ensuring that you maximize the value you have created through your lifetime of business success. After all, who other than you would have the best ideas to liquidate this crucial family asset? Why not take a day to write down the step by step details of what you would do so that you can review and periodically update in order to create the opportunity for it to be sold efficiently? More importantly, it would become the blueprint for your family to follow if you weren't here to provide personal instructions.

In closing, a good investment advisor can help you make better investment choices, achieving solid returns that, with compounding, will mount into substantial dollar gains over time. Of course, no advisor can or should take over your role as the ultimate decision maker. That responsibility belongs to you and you alone. But with the right kind of advice, you'll be better equipped to make the critical decisions necessary to reach your goals.

Printed in the Ottawa Citizen "Your Money" feature on Thursday February 4, 1999