3 Common Personal Finance Mistakes That Small Business Owners Should Avoid
Mixing business and personal finances has never resulted in much good. Read how you, as a small business owner, can avoid common pitfalls in the area of your personal finances.
As a financial advisor, I’ve met many small business owners who are amazing at what they do. Yet, I often see a pattern of personal finance mistakes amongst them. Small business owners are often so focused on their business finances that they forget the need to make sound decisions for their own wealth.
Based on discussions I’ve had and my own experience as a self-employed individual, here are three common personal finance mistakes I’ve noticed.
Mistake #1: Mixing Business and Personal Finance
Small business owners - especially those with newly established businesses and who work alone - find it convenient to have one bank account for both business and personal transactions. This is a big no no.
Having just one account for both purposes will not give you a clear picture of your finances. You may be tracking your business income stream and expenses on a separate software or app, but you may not be accounting for monthly budgets.
Another expense that is often overlooked is taxes. I’ve spoken to several small business owners who struggle when it comes to filing annual returns if they have one account for both purposes. They often cannot differentiate between business and personal expenses and have to print out bank statements and go through these line by line during tax season.
Having separate accounts will save you time. You can get a quick overview of incoming and outgoing monies and budget accordingly. It will also help you to understand how much you are earning from the business, how your personal finances are keeping up and how much you’re saving. It’ll also ensure that you are filing taxes correctly.
Mistake #2: Not Setting Budgets
When you first start a small business, you should have a vague idea of what your business expenses will be. You may be trialing some products and services and then deciding which one to go with at first so you may not have a budget that’s set in stone. That’s perfectly fine; in fact, budgets are supposed to be refined as things unfold. But at least have a rough budget. Pen this number down instead of just having a vague idea in your head. Include the possibility of future big purchases, loan repayments, and off-peak business periods.
Other than business numbers, what most people, even seasoned business owners, overlook is to set a personal budget. You need to know how much your bare minimum living expenses are and set aside that amount as your “salary” or savings for rainy days. Also, don’t forget to grow your savings outside of your business! Don’t just leave it all in the bank or reinvest every cent back into your business; you need a second pot that you can fall back on if the business doesn’t take off. Or, in happier cases where the business succeeds beyond your wildest dreams, you’ll still need a separate “cash cow” when you eventually divest or hand over the reins. And it all starts with that little bit that you set aside now.
If you go back to point number one and have separate business and personal accounts, you’ll be able to make both business and personal financial decisions quickly based on your overview of cash available.
Mistake #3: Not Saving Enough for Emergencies
In recent times, we’ve seen many small businesses take a hit. The COVID-19 pandemic has shifted our normal way of operating, and small business owners have struggled to keep up. While many smaller establishments have kept themselves afloat by serving regular clients and maintaining a lesser but constant flow of income, small business owners have had to make changes in their personal lives.
Drastic lifestyle changes during this pandemic have happened due to the lack of personal emergency savings. For regular nine-to-fivers, the rule of thumb is to have at least three months’ worth of income as an emergency stash. However, self-employed individuals need to account for at least six to twelve months of the same, considering that income is not always stable. This amount can also be challenged especially since we’ve seen this pandemic last for more than a year.
Emergency savings have to be kept for various reasons. In business, it can pay off rent or loans when cash flow is weak. Or to pay wages when invoices have not been cleared. In your personal life, you never know when a crisis might hit, when health may take a turn for the worse, or when you cannot cash out enough profits to live a comfortable life. Take all these things into account when planning your emergency stash.
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After meeting many small business owners and noticing their personal finance mistakes, I can reassure you that all these can be corrected, fast.
All it takes is some adjustment of your current financial systems and discipline to stick to a routine and a budget so you can reap the most benefits out of the small business owner lifestyle of your dreams.
Need help with your finances? Let’s chat.
- Esther Perh
This page is purely for informational purposes only and should not be relied upon as financial advice. The statements and opinions expressed on this page are my own and are not endorsed by finexis.