It never ceases to amaze me how few people know what their money has actually done for them. I see small business owners all the time who know to the nickel what their sales, costs and returns are inside of their company but they know very little about their external investments. They don’t ask and their advisors don’t tell. We all should know our return-on-investment (ROI) for each investment basket for each of the last one, three and five year periods.

There are numerous reasons why the information that you are looking for is not always forthcoming. Calculating real returns can be complicated and not everyone has the analytical knowledge and expertise. Another factor is that there are plenty of hidden costs, which nobody wants to tell you about. My favorite examples include the true management costs of mutual funds, transaction costs and the never-ending array of administration fees. But most often the reason is simply poor performance, and nobody wants to relay that message.

However, it is your job to find out. I have two rules: 1) you can’t manage what you can’t measure and 2) if you’re not in control then who is? You must ask of all the tough questions to find out not only how much money you’re really making, but how much money everyone in the advisory chain is making. When the chickens come home to roost you will be surprised.

One of the characteristics that successful small business owners share is the desire to have up-to-date information. They must stay current to be in control at all times. They hate surprises. So it always puzzles me that so many of them continue to have investments where they get limited information and are not directly in control. Let’s look at the mutual fund concept as an example.

As soon as your money is allocated to a group of mutual funds you have introduced more levels of management. These additional layers hinder direct communication and put you farther away from your investments. Reasons for poor performance become harder to track down and responsibility has been diluted. You know your banker and your accountant, but who is this mysterious fund manager? Where is your money actually invested? What are your true costs? You have lost control.

Using a strategy based on mutual funds reduces both access to timely information and hence the ability to make quick decisions. But you can stop playing this guessing game, and manage your money like you manage your company. An appropriate mix of exchanged-traded indexes, individual company shares, and dividends will simplify this part of your life dramatically. The ‘buck stops here understanding’ must be directly between you and your Advisor.

Remember – The real definition of risk is in not knowing what you’re doing.

Most small business owners end up carrying a higher cash reserve in their operating company than they are likely to need over the next 6-12 months. This may be to cover short term expenses, for unknowns that lie ahead, or simply to maintain liquidity for potential future deals.

This decision should be looked at closely. There is a huge lost opportunity cost (LOC) of continually keeping money in the bank making next to nothing, when you could safely be making a reasonable return on it. The bank certainly doesn’t let your cash sit idle. They put it to work right away making money with your money. It is important as well to realize that you are taking a loss of 3% per year due to inflation. In the long run you would be surprised to see what the total compounded loss numbers of LOC + inflation look like.

What I offer clients in these circumstances is the option to either open a corporate or holding company investment account. This value-added service is provided free of charge. Their money can easily be transferred back and forth as needed and it is always working for them. Investments such as government bond indexes and mortgages offer both a higher return and the safety that is required.

Remember – the person that turns over the most rocks wins.

Only a tiny fraction of small business partners have put things in writing from the very beginning. They don’t think it’s necessary or they just prefer to defer the cost. However company disagreements are inevitable and you must have a mechanism for working through these periods. Taking the ‘go to court to settle matters’ route can be much more expensive down the line, and is never a relationship builder.

Most people in today’s investment world are convinced that the RSP is the top investment vehicle available.  Although contributions to your RRSP can be deducted from your income and future earnings aren’t taxed until money is withdrawn, it is always important to examine the fine print. Let’s have a closer look.

Banks and governments love the RSP. One gets your fees and never wants to give your money back. The other can hardly wait for that big tax haul at time of death. (It is very hard to die broke).  It is sold on the income tax saving premise, but you’re not really saving tax, you’re just deferring it.  You have to do the RSP math all the way through until the end when you get all the money back into your pocket. The short term tax deferral for any given year can be diminished by longer term results.

An alternative is the holding company, which is often a numbered company. Besides the flexibility of being able to pay family members, there are several investment advantages as well. It allows for a tax loss selling strategy to negate other capital gains. It accepts other holdings such as real estate. The tax credit on dividends earned from the investments is very appealing. You can transfer cash back to the operating company at any time if needed.  You get to take advantage of the lower tax rates on capital gains and dividends, whereas all RSP withdrawals are taxed as income which is usually twice as high. And finally it does not cause other income flows such as pensions to be clawed back.

A holding company ‘may’ be a better investment vehicle, but each case is different. I encourage clients not to simply use the RSP because it’s the Canadian thing to do. Explore your options and do the math all the way to the end to get an accurate comparison.  Since the small business owner is in control of his cash flow, you may consider a plan to deplete your RSP before retirement, not after it begins.