From assessing competitiveness to reducing risk, giving thought to specific planning aspects can help set the stage for success.
With over 1.1 million of them across Canada, and representing over 95 percent of all employer businesses, small businesses (those with 1 to 99 paid employees) are a main hub within the Canadian economy.1
According to the Government of Canada’s 2019 Key Small Business Statistics, each year there are, on average, roughly 95,000 new businesses created, yet in both the goods-producing and service-producing sectors, only about 45 percent survive the first 10 years in business.2 Whether you’re a new entrepreneur or you have a fresh idea in mind and are thinking of becoming a business owner, here are some important considerations to help encourage the success and longevity of your business.
Ideas for a new business are often born from personal dreams and ambitions or from life experiences. As you flesh out your business idea, before you start operating, take time to define your competitive advantage, identify your target customers and conduct market research by addressing questions such as:
To help in answering these questions, consider searching for industry information online or attending events or conferences, surveying potential customers, speaking with market experts, researching similar companies in other areas and studying your competitors. The information gathered will help you with the next step: creating your business plan.
Venturing into a business endeavour can be exciting and inspiring, but it can also be unnerving because of the demands on your resources, time and attention to help make it successful. For many entrepreneurs, financial security is closely tied to their business, and this is where a solid business plan may be a key element in helping ensure a company’s success.
At a high level, your business plan should define and map out how you’re going to execute your idea. Before your business is up and running and then as you work towards your short-term and long-term business objectives, your business plan can be a crucial tool for a number of reasons. For example, it necessitates careful thought before you actually start, it may help in securing financing, it gives you something to measure against down the road, and it may help you zero in on specific steps or decisions along the way.
With a “the more details the better” approach, some main components in your business plan should be:
Note: As you start your business plan, this may be an ideal time to consult with and seek support from qualified professionals such as accountants, lawyers and other trusted advisors who can provide expertise in addressing your goals and circumstances early on and who can draw on experience with other business owners.
Deciding on a business structure is often the first aspect many entrepreneurs focus on. The three main structures are sole proprietorship, partnership or corporation.
In general, a sole proprietorship is easy to set up and low in cost to operate. Sole proprietors are considered personally responsible for the business, and there is no legal distinction between the owner and the business. From a tax perspective, income is reported on a calendar-year basis on the owner’s personal tax return.
Research shows that entrepreneurs who write formal business plans are more likely to achieve business success and viability than those who don’t record their ideas and plans.3
A partnership is created when two or more persons pool resources to co-own a business and, in most jurisdictions, the partnership can be general (where full legal liability is jointly shared among all partners) or limited (where liability is limited to the amount invested). Partnerships generally have set-up costs (which may include obtaining certain licences, and it’s recommended to have a partnership agreement drafted), and control may be determined by the partnership agreement. Each year, the partnership must prepare and file an information return with the Canada Revenue Agency, and each partner’s share of the profit/loss is included on that partner’s personal tax return.
Corporations generally have set-up costs and typically involve more complex administrative requirements. Control may potentially be shared with a number of shareholders, and legal liability is transferred to the corporation. Regarding taxes, the corporation files a tax return, and income is first taxed in the corporation. After-tax income may be distributed to shareholders as a taxable dividend. Overall, there may be certain corporate tax advantages and disadvantages depending on specific circumstances.
In considering business structures, it’s important to consult with qualified legal, tax and financial advisors to align your needs and goals with the best option and to ensure all decisions are made in accordance with the latest tax regulations. Also keep in mind that as your circumstances change, a business can evolve from a sole proprietorship into a partnership, or either of those structures can evolve into an incorporated company.
As part of business planning, cash flow and sales forecasting can help in allocating resources and projecting the types and amounts of sales needed each year. It’s then important to estimate expenses to ensure that generating a profit is possible.
Once the business is in operation, continually monitoring your financials will help you track your cash flow, profits and expenses to make sure there’s an appropriate balance. It also better positions you to make adjustments as needed to help in setting prices, managing costs, avoiding cash shortfall and generating cash surplus.
Profitable businesses can have cash shortfalls and, likewise, unprofitable businesses can generate cash surpluses. This is why it’s important to monitor financials and cash flow projections, which then supports planning and making informed decisions accordingly. Avoiding or correcting shortfalls may be accomplished through a variety of approaches, including by being diligent with receivables and potentially using online or mobile banking to collect payments quickly. In situations where there’s a cash surplus, it becomes important to determine the best choice for those funds. (Is there a business need? Do you have a personal need, or could the cash be used for retirement goals?) The appropriate use of surpluses should be decided with future cash projections in mind.
Tax considerations are likewise important to factor in. Every business that makes a profit has to pay a percentage as a business tax; who pays the tax and when that tax is paid depend on the legal structure of the business.
With a changing economy and advancing technologies, the world of work and the job market in Canada have more recently been shifting. Part of your company’s competitive advantage may be in how you look to attract and retain employees.
Even for smaller businesses, employer-sponsored savings and retirement plans, like a group Registered Retirement Savings Plan (RRSP), may be valuable in drawing in top talent and building a loyal employee base over time. Group RRSPs operate like individual RRSPs (generally with some additional restrictions) and may be more cost-effective and easier to administer than pension plans.
Depending on the type of business and how it operates, features such as flexible work arrangements, health and wellness programs, telecommuting/remote office options or your company’s social purpose or mission may also help you stand out among potential hires.
According to recent North American research on employee loyalty and satisfaction, 37 percent of Canadian and American employees surveyed noted they were actively or casually looking for a new position.4
While it can be easy to get swept up in the day-to-day activities of starting and growing a business, it’s never too early to think ahead about ways to limit risk and protect your business, yourself and your family.
When setting up your business, keeping personal assets and business assets separate, where possible, is a beneficial step in reducing risk. Opening a business account can be helpful in this regard, as it functions to separate your business expenses from your personal ones, track your business income and build a credit history for the business.
To safeguard from the unexpected and to help protect all that you’re working to achieve, different forms of insurance solutions may be available. Depending on your circumstances, commercial property insurance (or personal property insurance if you run a home business) can protect your business in the case of fire or theft. Life and living benefits (including personal life, disability and critical illness) insurance can protect you, your family and your business. And, key person insurance can protect the business in case a partner or key employee becomes seriously ill, faces a situation of disability or incapacity, or passes away.
The journey of starting a business can feel like a rollercoaster, and it may sometimes be intimidating or overwhelming to tackle the many steps to get it up and running, but remember, doing the initial planning and seeking out the right supports can go a long way in helping boost your company’s ultimate success.
Shared experiences can often be a great source of motivation. Find out how Dr. Marjorie Dixon forged ahead in building her business in the RBC WM article “Starting a business? How to plan for success as an entrepreneur.”
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