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Whether entrepreneurs get their startup money from their savings, through borrowing or by reducing discretionary spending, the less they need to dip into the first two pools, the better, says one advisor.DASIC MARKO/iStockPhoto / Getty Images

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About two million Canadians started businesses since the start of the pandemic, according to a report Intuit Quickbooks Canada released last year, and that number has surely grown since then. Yet, many of these new entrepreneurs who are meeting with their financial advisors for help on how to navigate their newfound ventures have little past business experience.

While most new business owners are focused on whether their product or service will sell, it’s important they understand business taxes, plan their cash flow and set income expectations right out of the gate, several advisors say.

Liz Schieck, a certified financial planner in Toronto, is used to dealing with new entrepreneurs in her work at the New School of Finance, an advice-only financial planning firm and course provider.

She says one of the first things she’ll discuss with them is planning for their taxes – and about the misconceptions many have about what business owners can deduct. For example, clothes and restaurant meals don’t just become tax-deductible the day someone becomes an entrepreneur, despite what many appear to believe.

“If you have a yoga teacher, they want to deduct all their yoga clothes,” Ms. Schieck says. “The Canada Revenue Agency might not agree with that. [The clothing deduction is] meant for things like uniforms, costumes or steel-toed boots.”

Ms. Schieck, whose firm has long had a strong contingent of self-employed clients, says she starts by covering how sales taxes work, and if the business needs to be collecting them.

She’ll also talk about how to plan for income taxes, so the bill doesn’t come as a surprise and require a loan to pay off.

“From the start, everyone should have separate savings accounts to save their income taxes,” she says, noting it’s particularly important for people who start a side business while still employed to estimate whether they’ll be in a new tax bracket when adding their business income. “[Being] an employee and also self-employed can lead to a higher-than-expected tax bill.”

Early on with new entrepreneur clients, Ms. Schieck likes to calculate the profit they’d need to make to cover their business and personal expenses, and also to save for retirement. She calls that figure the client’s target income and says having a goal to work toward helps clients trim their expenses and focus their business decisions.

When to incorporate a business

Rona Birenbaum, certified financial planner and founder of Toronto-based fee-only financial planning firm Caring for Clients, says many small businesses never make profits beyond what is used for their owner’s income. Such businesses should be wary of the “rush to incorporate” she often sees among new entrepreneurs.

“You don’t want to incorporate for tax purposes until you know you’re going to be making profits in excess of what you will pull out for your personal needs,” Ms. Birenbaum says. “Sometimes, that’s never.”

While the upsides of incorporation include limiting liability and creditor protection, owners of unincorporated businesses have the advantage of deducting business losses from their other income, she says.

“Let’s say you have this business as a side-business, and in the first couple of years, it loses money. … That loss can be deducted against other income, like your salary,” she says. “If the loss is in an incorporated company, it’s, ‘Too bad, so sad.’”

Ms. Birenbaum says she encourages new entrepreneurs to make financial decisions for their businesses with a “sense of urgency,” saying that for some people, a lump-sum loan can seem like an endless reserve until it’s almost gone.

“Not anxiety, but urgency, so we don’t let it [get to where] a client is behind the eight-ball,” she says.

Ms. Birenbaum says it’s also important to use separate business accounts and debit cards so the business’ financial health is obvious at all times.

“Everything should operate in its own little silo so you can’t ignore the financial realities going on in the business,” she adds.

How to gauge financial success

Whether entrepreneurs get their startup money from their savings, through borrowing, or by reducing discretionary spending, which is something she always advises in the early days of a business, the less they need to dip into the first two pools, the better.

“With our clients, we’re working closely with them to make sure things don’t get too far astray,” Ms. Birenbaum says. “It’s a way of keeping them honest and realistic about the success they’re having or not having.”

When considering the new pandemic-era businesses that have sprung up, Olayinka Brimoh, certified financial planner with Holistic Insurance and Financial Services Inc. in Winnipeg, has noticed mostly side-businesses selling products online, and a few selling services as well.

For those that are selling physical goods, he says it’s important to keep a sharp handle on inventory and cash flow, lest too much of the business’s money gets tied up in unsold products.

“Be sure that you get paid for what you sell and to watch your cash flow every time,” Mr. Brimoh says. “If you’re not getting paid or you have unsold inventory, there’s no point in producing more or buying more.”

He says to start with a narrow product range and a small run of each item to make sure it gets the traction expected.

While he meets many new entrepreneurs who want to go big right out of the gate, he says, “Why not start by producing 500 or 1,000 units and expand until you get to your dream?”

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