When one sets up a business, they hope that it will make a profit and that it will be able provide enough to take care of their financial needs. However, the number one mistake that I have seen with new entrepreneurs and even some seasoned ones is that they mix business finances with personal finances. The business may have cash flows, but it doesn’t equate to the owner having cash. Let’s not forget that business is a separate legal entity and therefore distinct from its owners. Suppose your business is making good cash flows, it’s common for some people to use that money as and when it flows in. You will find some entrepreneurs buying home groceries, paying school fees, fueling personal vehicles and just treating company cash flows like a bottomless well full of water.
They then struggle to restock their business, buy raw materials or maintain their equipment. Others even fail to pay employees on time because they have used up all the cash. This is prevalent in large companies as well as in small sole trader businesses. Below are suggestions on how to remedy this.
- Obtain separate bank accounts, one for business and another for personal or household use. Cash received for the business should be banked the next day and must not be mixed with household cash
- As a business owner, pay yourself together with the other employees at the end of the month or fortnightly. Pay yourself a decent wage in relation to your business not a wage that you think you deserve because you are a director. The owners wage should not cripple the operations of the company.
- Prioritize reinvesting in your business and not spending all profits on yourself or family. Restock your business, grow your asset base, maintain your equipment and have a plan for scaling operations.
- Understand the difference between cashflow and profit. The business may be cash rich but is it making a profit. A business owner needs proper record keeping in order to analyse expenses and income correctly and to determine whether the business is making a profit or not.
- This all hinges on self-discipline. An entrepreneur must be disciplined enough to delay gratification, to keep your hands away from the business purse whenever you have a need. Put limits and systems in place such that you are accountable to someone and they can assist you in keeping away from that money.
- Educate your family on what you are trying to achieve, how you are running the business so that they walk this journey with you in understanding. The result is, your spouse doesn’t expect to take money from the business at any time because they understand that the family finances and business finances are separate. You need to manage your family’s expectations by making them aware of the business philosophy that you have adopted. Teach your children what it means to run a successful business, the difference between cash and profit and the importance of reinvesting in that business. Children learn best from their parents.
As an entrepreneur, establish your business with the future in mind. You have to feed the golden goose for it to lay the golden eggs. If you keep taking eggs without feeding the goose, it will not produce more eggs in the future and will eventually die.