For their ventures to succeed, small business owners will need to develop business growth plans. Sarah Adams, RBC’s Toronto-based vice-president, small business, said a business plan is the core element of a business and is critical to its success. “Once it is in place, it will allow the owner to check whether the business is on track.”Developing the plan involves a realistic understanding of the market in which the business will operate – its potential clients and its competition, Adams said. “It involves knowing the strengths of the business, and knowing what growth will look like for this particular business. It involves identifying a support network of other business owners and professions to turn to for advice. And it involves forecasting when the business will earn its money.”
A carefully prepared business plan can also be instrumental in convincing potential investors and lending institutions that a business is a viable concern, said Paul Kyte, Toronto-based vice-president, commercial banking, at BMO Bank of Montreal.
Kyte listed six key elements of a business plan:
- The executive summary, which includes how and when the business started; the products or services it supplies; and the business structure—a sole proprietorship, a partnership or a corporation.
- Management and ownership details, including the names of the principal owners and the percentage of the business that each has; the experience each brings to the business; and the experience, management strengths and commitment of all the business’s key players.
- The market for the business’s products and services. This includes a description of the size of the industry in which the business operates and its major players; key trends and anticipated changes in the industry; critical success factors for the industry; and barriers to entering the industry. It also includes description of the target market: who buys the business’s product or service, the size of this market and its geographic area. It includes a description of who the competition is, their strengths and weaknesses; and what gives the owner’s business a competitive edge. And, finally, it includes a marketing plan detailing the market research that has been done; how the business will attract customers; and how it will advertise its products or services.
- Products and services. The plan needs to detail what these are; their benefits; and if there are trademarks, copyrights, licenses or guarantees associated with them.
- Operations information. This includes where the business will be run; the size of the office or factory; the terms of leases; overhead costs and how they are allocated; key suppliers and the payment terms negotiated with them; inventory costing and control methods; regulatory requirements of the business; the number of people employed and their salaries, the number of independent contractors and how they are remunerated.
- Projected financial information. This includes a profit-and-loss forecast based on a projected income statement; a cash flow forecast; a balance sheet forecast; and an outline of a projected capital expenditure budget.
Knowing when cash and cash equivalents will come in and when they will go out of a business, and having cash on hand when you need it, is the cornerstone of cash-flow management. “Many businesses are seasonal,” Adams said, “and large inventories will tie up a business’s money. But it will need large inventories during its high sales period.”
There may be a gap between when a business has to pay its suppliers and when it can expect to be paid for its products or services, noted Grant Black, BMO Bank of Montreal’s Halifax-based vice-president, commercial banking, for Nova Scotia. “It may need credit to bridge these gaps. If a business does need credit, there are two types of loans it may be able to access: operating lines of credit based on the value of inventory and receivables for short-term expenses, and term loans for larger expenses such as equipment. Don’t mix the two, keep them separate.”
Adams suggested checking out credit opportunities under the Canada Small Business Financing Program (http://bit.ly/csbfp-en), which helps small businesses access loans from financial institutions by sharing the risk with the federal government. Businesses eligible for the program must operate for profit in Canada and have gross revenues under $5 million. Maximum financing under the program is $500,000, and loans can be used to purchase or improve land or buildings used for commercial purposes, purchase new or used equipment, renovate leased property, finance commercial vehicles or buy a franchise.
Economic downturns can throw a wrench into a business’s sales cycle, and Kyte offered the following tips to recession-proof a business:
- Make sure the business is well-capitalized so it has enough cash to stay afloat in potential storms.
- Maximize cash flows by resolving overdue, receivable issues, shortening up receivables and pushing back payables.
- Take opportunities to renegotiate with vendors and get the best deals.
- Take time to review the business’s expenses and see where they can be reduced. >
The decision of whether to hire employees or independent contractors is a major one, and requires careful consideration.
“Contracts of service establish an employer-employee relationship,” noted Wilmot George, director of tax and estate planning at Mackenzie Investments in Toronto. “Under this arrangement, the employer is responsible for deducting income tax, Canada/Quebec Pension Plan and employment insurance from employees’ salaries, and must pay the employer portion of CPP/QPP and EI premiums.”
Employers may also want to set up benefit plans to retain employees,” added Aurele Courcelles, Investor Group’s Winnipeg-based director of tax and estate planning.
Contracts for service, on the other hand, establish a business-contractor relationship. “Independent contractors run their own businesses,” Courcelles said, “so they pay all CPP and EI premiums, and provide their own tools and equipment for work. And there is no need for the employer to provide vacation and termination pay.”
The disadvantages of using independent contractors, George said, is less loyalty and commitment from workers, and the employer has less say about how the work is carried out.
What is important, he emphasized, is that the business owner choose the right status for the working relationship. “Sometimes the nature of the work will determine the status, but if the status is not reflected in the actual terms and conditions of the working relationship, the business owner can be liable for both the employer and employee portions of CPP and EI premiums, plus penalties and interest. And workers may have their tax deductions reversed.”
A business owner can request an advance ruling from the CRA on whether a worker’s employment is pensionable and/or insurable by filling out Form CPT1, Request for a Ruling As to the Status of a Worker under the Canada Pension Plan and the Employment Insurance Act http://bit.ly/cra-arc.
A business owner may need to draw income from the business. Income from sole proprietorships and partnerships goes to the proprietor or partners, and is reported to the CRA on their personal tax returns. Business losses can be used to offset a proprietor or partners’ other income.
An owner of an incorporated business, on the other hand, will have to decide whether to withdraw funds from the business in the form of salary or dividends. This is a big decision and one that will have ramifications on the owner’s retirement income.
By drawing a salary, the owner of an incorporated business is creating contribution room in a registered retirement savings plan. A salary will also make him eligible for Canadian/Quebec Pension Plan benefits and for income-splitting opportunities with a spouse.
“But the corporation will have to pay its share of CPP and EI,” Courcelles said, “which is why shareholders often take dividends instead of salaries.”
The business owner who chooses to be paid in dividends wants to see the business’s retained earnings build assets within the corporation. Business income that is retained within a corporation benefits from a significant tax deferral, and the preferred tax treatment of dividends and capital gains earned outside of an RRSP.
Business owners who have investment assets in their corporations will want to consider the tax implications for the type of income these assets earn. George noted that the corporate tax rate on interest-bearing investments is currently 46.2% in Ontario and 45.7% in British Columbia; on dividend income it is 33.3% in both Ontario and British Columbia; and on capital gains it is 23.1% in Ontario and 22.8% in British Columbia.
“Investments that produce capital gains are the most tax-efficient,” he said, “but it really comes down to several factors that financial advisors can help business owners clarify – risk tolerance, investment objectives and time horizon.”
Regarding time horizon, George noted that consideration should be given to how long the business owner plans to be invested. “There may be unforeseen business expenses ahead of you. You don’t want to have money tied up when you need it.”
A business owner may also opt to be repaid for a shareholder loan he made to get the business on its feet. “He wasn’t able to deduct the loan when he made it, so there will be no tax consequences when he is repaid,” Courcelles said. “But he needs to consider carefully whether the company can afford to pay this money back. If he doesn’t pull it out, the money can be invested within the company.”