August 2008:
by Jos Herman
Your personal and business balance sheets
Much like the balance sheet of your company,
it probably started with minimal assets... debt balances may have
been higher than desired. As the company grew, so too did the
assets. Building up your personal balance sheet is much like this.
Often you accumulate your personal wealth through
investment, employment and business income. However, what most
people fail to do is formalize this listing and compile a personal
balance sheet, otherwise known as a Net Worth Statement. This
"statement" lists the values of your assets and liabilities
you hold. Your Net Worth Statement includes the value of the business,
principal residence, investments, other real estate holdings and
debt such as a mortgage, etc. It is a measure of financial progress.
Your personal balance sheet highlights the improvement
of your overall financial picture over time. This financial picture
is ever changing during your lifetime. At certain points in time,
it may reveal particular assets declined while others appreciated,
but that overall financial progress has improved.
So why do this?
First, by compiling your Net Worth Statement, it gives a financial
snapshot (much like the balance sheet in your company) at a given
point in time, that is formalized. This listing should then be
updated for any changes. The worst thing to do is compile this
listing and neglect to revisit it ever again.
Secondly, the Net Worth Statement is a benchmark.
It is a starting point to determine potential wealth accumulation
and preservation strategies to maximize your opportunities for
financial growth geared toward:
- Tax efficiency
- Debt management and elimination
- Risk management.
With such a benchmark, it can help identify
if there are "holes" or potential opportunities in order
to meet your financial objectives. Your Net Worth Statement should
be an integral part of your financial planning process.
For estate planning purposes, your Net Worth
Statement can act as a summary of those assets and liabilities
that need to be settled in your estate. It allows you to assess
your intentions with those assets. Let's take the example of Mr.
and Mrs. X that operate a business and hold various assets, such
as personal investments (registered, but no non-registered), a
cabin, and their home. They have two adult children. Consider
the possibility that one of the children truly enjoys the cabin,
while the other is heavily involved in the business. What is the
best option for ensuring that the estate is distributed tax effectively
and fairly should both Mr. and Mrs. X pass away?
Take another example, whereby Mr. X holds personal
assets in various locations, and with other third parties in the
business community. The issue arises whereby Mr. X finds it difficult
to keep on top of those assets that he has accumulated over the
years. By maintaining a Net Worth Statement, it allows you to
track your ownership holdings should they be 100 per cent wholly
owned or you are holding the asset in a joint tenancy arrangement.
By also listing the ownership interest, it may determine if you
have exposed yourself to a negative tax situation upon the sale
of the asset or at death.
Your Personal and Business
Balance Sheets
As a business owner, the ability to accumulate wealth outside
your business is just as important. Your focus should be on accumulating
both strong business and personal balance sheets. If your personal
balance sheet is strong, diverse and tax efficient, it may facilitate
your exit strategy from your company.
By ensuring that you have both your personal
and business balance sheets in check, it affords you flexibility
to not only rely upon the proceeds from the sale of your business,
but the ability to draw upon your personal balance sheet to fund
your retirement.
. . .
About the author
Jos Herman, CA, is a Financial Advisor with Regency Advisory
Corporation.
Disclaimer
Please contact a professional advisor to discuss your particular
circumstances prior to acting on the information above. The opinions
expressed are those of the author and not necessarily those of
Assante Financial Management Ltd.
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