Hello, this is Naomi Burgess. This post is targeted towards those entrepreneurs who are having trouble distinguishing their business expenses and their personal expenses. I’ll do my best to help you manage your finances so that you don’t encounter any surprise losses.
Separate your personal and business lives
8 out of 10 new business owners have trouble keeping their professional and personal lives separate, especially at the start. Unfortunately, this sometimes applies to expenses as well as other aspects of running a business. There are many stories of inexperienced entrepreneurs who didn’t keep their business and personal assets separate and suffered great losses as a result of not being able to understand that their job wasn’t their life.
So how can you avoid being another statistic? Surely all those people knew about the dangers of maintaining a distance between their professional and personal lives?
Learn the process
Perhaps they had. However, running a business is very difficult and time-consuming, and it’s very easy to miss some things that eventually add up and lead to a disaster. There are many books and articles out there that are full of tips on how to be a better entrepreneur, how to manage personal finance and how to make sure your start-up is “the next big thing”. All of those can be rather confusing and coupled with the stress of running a company can lead to discrepancies and messy accounts. I’ve written some simple tips on how to avoid the above pitfalls below, and I hope that you find them helpful.
Organized your expenses
The most important thing, as banal as it sounds, is to stay organised. When you’re planning a budget for your business expenditures, make sure that you plan for short-term, long-term and future ones. I’m not saying you can’t apply the same structure to your personal expenses too, and they can indeed overlap, but make sure to distinguish between them. The short-term expenditures are the urgent ones, the ones you need to take care of right away, e.g. taxes, whereas the long-term ones, e.g. insurance, can wait. Future expenses can include payments to be made monthly to suppliers, rent, and other things. These future expenses should also include payment plans for your customers, particularly if that’s common in your industry and you’re at the level that allows you to have payment plans.
Planning is, of course, a wonderful thing, but it’s of little use to you if you don’t monitor your cash flow. Keeping a record of everything might seem daunting and complex, but as I mentioned above, staying organised and keeping track of incoming and outgoing funds at all times is very important. Write down each expense, no matter how small, and allocate some time each week or month to analyse the balance sheet. The results of this analysis would be able to tell you whether to carry on as you are or to cut back. If you have little accounting experience, you can hire an accountant or use an app – there are many budgeting mobile apps available today.
Making sure the records of your expenses are all in order is just one part of staying organised. Payment plans are a great tool on paper, but they’re worthless if you don’t spend a little bit of time every week or every month discussing the finances with your clients. I’m not saying you shouldn’t trust some of them, but the business world is constantly changing, and it’s important to foster client relationships. If your communication is limited to weekly or monthly bank transfers, there is a risk of them leaving you, no matter how good of a deal your payment plan is. Clients appreciate it when you communicate with them because it makes them feel valued. Don’t hesitate to ask them for feedback about your payment plan and inform them of any changes to it as soon as you can.
You should also keep your bank informed. I would never, ever advise concealing things from financial institutions – if you’re unable to make a payment in time, let them know immediately; don’t waste time and energy trying to avoid that conversation. I also strongly suggest that you do so before you make a decision to borrow even more money – debts pile up very quickly and I’m sure I don’t have to tell you about the risks associated with that. In general, honesty is the best policy in business relationships (as well as personal, but that’s not my area of expertise). The more honest and upfront you are the more people respect you.
In all fairness, no business is 100% safe from financial trouble. But if you plan your expenses carefully, like I advised you to above, kept track of each of them, and stay upfront with your clients, suppliers and banks, you would be able to have better odds!