Gail Van-Oxlade, 'Til Debt do us Part

You’re probably already familiar with Gail Vaz-Oxlade,Til Debt Do Us Part and her no nonsense financial advice.  We asked her for her thoughts on financial smarts for entrepreneurs.

Gail Vaz-Oxlade, 'Til Debt do us Part Being an entrepreneur, we have flexible incomes.  Some months are huge, some can be dry.  How can an entrepreneur effectively create a budget?

 

For anyone living on a variable income, the trick is to even out that income. First you decide how much you need to take as an income to meet your Must Have Needs. Next, you open up a separate bank account for your professional income (not your personal income) and you deposit all the money from your biz in there. (It doesn’t have to be a biz account specifically, just a separate account.) Then every month regardless of what you make, you take only the Must Have income out as your compensation. Over time the biz account will build up a surplus that can be used in the months when billings are lower. Once you’ve got that built up to about three months’ worth of your personal income, you can increase your personal income to include your nice-to-haves, always making sure you continue to build your biz account up for flexibility.
What percent of income should entrepreneurs save?  Is it the same as someone on a fixed income?
The amount you save has more to do with your future than your present. If you want to have a rock-solid RRSP, then you’ll save as much as you can in that vehicle. If you want to build your biz income up and use that for retirement, then you won’t do much personal saving. But be aware that if things turn south in the biz, you may risk losing all those “savings.” Personally, I like a combination of the two. As a self-employed person, I’ve always had personal and biz savings.
At what point should a company incorporate?
The general rule is the higher the net income of your small business, the more sense it makes to incorporate. A corporation is a separate legal entity, which means it pays corporate income tax (at a much lower rate), which is calculated completely separately from personal income tax.  When a corporation pays wages to its shareholders (owners), income tax and CPP contributions, and sometimes EI premiums have to be deducted and remitted to the tax man.
One of the biggest advantages of incorporating a business is limited liability.  This means that the liability of the shareholders is usually limited to the amount that they have invested in their shares in the corporation.  However, many incorporated small businesses are not able to get bank loans without the personal guarantee of the shareholders, eliminating part of the advantage of limited liability.  Also, the personal assets of the shareholders are protected from lawsuits against the corporation, except for those shareholders who are also directors since they can be held legally liable for the corporation’s debts.
What are the financial benefits of incorporation?
Corporations pay a much lower rate of tax than individuals, along with having access to many deductions. However, remember that this is simply a deferral of taxes until profits are paid to the shareholder, at which point you have to pay individual tax on the money coming out of the corporation.
There’s also a $750,000 capital gains deduction on the sale of shares if you ever decide to sell the biz. and corporations can set up private health insurance plans, which can provide tax-free benefits to employees.  This deduction is also available to sole proprietors and partners, but the tax treatment for corporations is more favorable than that for unincorporated businesses.
What expenses should entrepreneurs keep track of?  What are some things people forget they can write off?
Oh you can write off a lot of things. From auto expenses (assuming you keep track of your auto use for business purposes) to all your equipment, furniture and supplies, to professional and legal expenses. A warning: some people see the ‘write off’ factor as an excuse to spend money. If you have to spend the money, it’s great there’s a write-off. But if you’re using the write-off as an excuse or justification to spend, you’re an idiot. Spent money is money that can’t be used again… the opportunity cost is huge. So take write-offs to be tax efficient, not to buy gobs of crap.
Don’t forget to write-off:
  • all your communication costs: phones, cells, internet
  • anything you spend on dues, for education or training
  • professional publications, software, and anything you spend to start or expand your business (like marketing costs, advertising, etc.)
  • gifts you may buy for clients
  • all the interest on your loans for your business.
What would be your biggest word of warning to an entrepreneur who is starting out on their own?
You’re going into business to make a living. If you keep spending all the money you make on crap and don’t have enough to support yourself, you’re playing at a hobby. Businesses earn money. Yes, it may take some time to make big money, but if you’re not making at least enough to support yourself, think seriously about what you’re trying to accomplish. I have had a LOT of people tell me they have a business but can’t make any money at it. Then get a job.
What are the financial advantages of being self-employed?
Oh, there are quite a few, but most of the advantages aren’t financial, they’re personal. The ability to set your own course. The ability to decide what you love to do and do it with passion. The time flexibility. I’ve been self-employed since I was 25 and I wouldn’t change it for a minute.
What piece of advice would you give to an entrepreneur?
People are under the misconception that when you’re self-employed you work for yourself. There’s nothing further from the truth. Self-employed people work for every customer they have. And customers can be a demanding lot. If you think entrepreneurship is a secret path to wealth and a short work week, forgedaboutit! You’re going to have to bust your arse. You’re going to have to jump through hoops. You’re going to sweat bullets, pull your hair out and cry in the shower. If you’re up for all that, along with working 70 or 80 hours a week to make the sucker go, then you’ve got the goods to be an entrepreneur. If not, get a job!
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