[THIS IS PART ONE OF TWO POSTS]

No, they are not like us. It’s not just the money. It’s their fibre, mindset and modus operandi. Entrepreneurs are a unique species compared to businesspeople and this should be reflected in their financial planning—but typically it’s not. After researching and advising over 500 entrepreneurs in Canada and beyond here are pointers for entrepreneurs to consider for sound financial strategizing.

1.  Imbalanced Portfolio

Entrepreneurs typically have an entirely imbalanced wealth picture. The bulk of their wealth is tied up in their business—that’s the crown jewel for them and their family. The business provides both their income and the wealth. Often they have ploughed back the profits into that business, and sacrificed savings to do so. This is great when it works out—but that is not always the case.

There is the complicating factor that their source of wealth is also their source of income. This is different than for most people. Losing a job typically doesn’t mean holding on to a rapidly depreciating asset—but it does for entrepreneurs. Entrepreneurs should be sacrificing some of the opportunity to plough back into the bonanza of the future for the security of today. There is no safety net for entrepreneurs.

2.  High Risk

Entrepreneurs frequently make a total commitment to their nascent enterprise, often at the behest of investors. Entrepreneurs sometimes provide a personal guarantee and put their family abode on the line. Or, they take a subsistence level wage during the frail start-up to show their complete commitment. Entrepreneurs often cut corners to preserve cash flow for growing the business. No or little life insurance, no RRSPs, no reserve fund. This is fine when it all works out, but the business landscape is littered with entrepreneurial corpses

Entrepreneurs typically have no pension other than the big hit. While the tortoises of society plod along in the context of a defined benefits plan, the entrepreneurial hare races toward the finish line and rests in a financial mirage. With extended life expectancies, the defined benefit pensions are completely unfathomable for entrepreneurs—they can only get close by a major windfall. Entrepreneurs need to think far into the future and beyond the next deal.

3.  No Budget

Entrepreneurs have challenges when doing budgeting and formal planning. The salaried person can predict with great certainty their financial trajectory. A friend from law school, who was doing fine in a major downtown law firm, plotted out what savings and assets he would have by grinding it out for another 30 years and on into a cruise-filled retirement. Many entrepreneurs couldn’t predict beyond the next full moon.

Entrepreneurs need to budget savings into their basic financial plan. The gravy that comes with a big hit should go into the unexpected bonus pile. Otherwise the entrepreneur may perish at the dock waiting for the ship that never did come in. Entrepreneurs are careful risk-assessors in terms of their business dealings, but are not always good at planning their own financial affairs.

 4.  Opportunity Cost

Entrepreneurs must do a careful self-assessment, as do all people, regarding the financial consequences of their choices. Research clearly shows that entrepreneurs go into it for self-fulfilment, making a difference and independence—and not for the money. And, as a consequence, in the twilight of their entrepreneurial odyssey they may not have much of it.

Given the risks of entrepreneurship, what’s the equation as to whether to go into entrepreneurship as a career path.   A rule of thumb is that an entrepreneur should expect to double their present stable income within 2 – 3 years. Thus, the opportunity cost must be considered carefully. If not, get a job.