When business becomes personal
Planning will not guarantee profit, but at least it lowers the risk of losing the business.
THEY say that running a household is very much like running a business. Once you become an expert in running your personal finances, it would be easy to manage your business finances. Sometimes, though, it can get complicated and it wouldn’t seem as simple as it should be. A lot of times individuals who are just starting their own businesses have to deal with a messy cash flow, thus eventually costing them the opportunity of making their business profitable. So here are some tips from personal experiences and conversations with some start-up business owners that could hopefully keep you from losing and get you closer to profiting.
1. Know how far your capital can go. Before even starting a business, figure out how much capital you’d need to survive at least three to five years. Plan out possible expenses to see how cash flow would look like once you’ve started. Know how you’d use the capital considering the potential expenses in putting up the business and the operating expenses once the business has started. Planning will not guarantee profit, but at least it lowers the risk of losing the business.
2. Have an emergency fund. Much like our household, businesses can encounter emergencies that can disrupt regular cash flow. Set aside part of your capital for these situations so as not to disrupt business operations. As a business owner, it will also lessen your worry on where you would scour for money when emergencies arise.
3. Separate business money and household money. There’s a reason mixing pleasure with business can be dangerous. If the pleasure is too good, you might end up forgetting you’re still in business, eventually losing all of the latter. Start off the right way by creating two different accounts: one for business and another for household. Avoid transferring money from one account to another unless there’s a really good reason you are doing it (like cashing in on profit/getting a salary). I’ve had encounters with small business owners having difficulty managing their cash flows because both business and household expenses are taken from one account only. Another good reason for doing this is if your business gets into financial troubles, you won’t have to worry about your personal finances as much.
4. Track expenses (separately) for business and household. One common mistake in personal finance is not tracking expenses simply because it’s too tedious. Creating a budget without tracking expenses makes budgeting useless. In business, expenses is one key component in assessing if your business is profitable, while in your household, tracking expenses allows you to see if you are living within your means. Keep a separate list as well so you won’t be confused.
5. Give yourself a salary. If your business will be your source for paying off household expenses, give yourself a fixed monthly salary instead of allowing yourself to freely get money from your business account. It will be very tempting to just get as much money as you want from your business account especially if you are the sole decision maker in the business. So to keep yourself away from this temptation, treat yourself as an employee of your own company instead of a business owner. Schedule transfer of salary monthly or bi-monthly and make sure to list your salary as a business expense.
6. Save and invest in expanding the business. Businesses, ideally should not be a one and done affair. Expansion is usually part of the business cycle. Save a part of your profit for eventual expansion instead of cashing in on profit early. A lot of times we’d want to cash in on profits immediately to satisfy our urge to splurge on personal luxuries. Before splurging look at the big picture and see what you want your business to be like five to 10 years from now. One could lose on the opportunity of earning more from the business if profit is realized and used for personal wants.
Jeremy Jessley Tan is a Registered Financial Planner of RFP Philippines. He is currently a Wealth Portfolio Manager for one of the leading insurance companies in the Philippines.
Source: http://www.businessmirror.com.ph/when-business-becomes-personal/
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