I’ve noticed a really interesting connection over my years working with business owners; how they run their personal finances is directly connected to how they run their business finances, their overall financial success and their ultimate wealth.
It seems to be around financial habits and disciplines. I remember working with a chief exec of a charity a few years ago; let’s say he lived life to the full and his personal finances were a total disaster. He never had any money, always ran out before he got paid each month, had no savings or investments at all, and ended up going personally bankrupt. Funny thing was, he ran the business finances in exactly the same way – total random chaos, lurching from one cash flow crisis to another, and massively overspending on costs that didn’t exactly further our charitable objectives.
Are you an over-spender?
If you have a habit of over-spending at home, and don’t like to be limited by setting budgets or being sensible, then there’s a good chance you’ll replicate this behaviour in your business as well. Then you have a double whammy – increased dividends for you to cover your personal spending, and higher costs for your business – all conspiring to make you poorer!
Getting your personal spending habits under control is a must if you want your business to be successful.
It’s really important that you have a fixed salary and dividend amount that you take out each month –firstly so your business can budget, and secondly so you know what you have to live on and can budget and live accordingly. I don’t have a problem with taking out bonus dividends for things like holidays and Christmas – because you can plan for them.
I’ve known business owners who had no fixed income from the business but just pulled cash out whenever they needed it, living a personal life without restraint and seeing their business as an unlimited piggy bank. As a result, both sets of finances were in turmoil. Hey this is fine if you have a stack of cash in your business and money really is no object, but that’s rarely the case for most small businesses. (although you’d be surprised at the number of people who live like it is!)
It only matters how much you keep
There’s a great saying that it doesn’t matter how much money you make, the only thing that matters is how much you keep. And remember, building profits and cash is the ultimate way to give you the most choices and options in the future.
How do you run your personal finances?
- Do you have a fixed salary / dividend each month, or do you pull cash out randomly?
- Do you live within your income?
- Have you got personal credit card debt?
- Do you have any personal tax money set aside for future tax bills?
- Do you have buffer cash set aside?
- Have you got a long term financial plan – ie how you’re going to live in retirement (ps, “my business is my pension“ isn’t a good enough answer!)
- Are you putting money aside each month into pensions and ISAs?
- Are you a spender or a saver?
- Do you plan for holidays, Christmas and things like home improvements?
Is how you’re running your home finances a mirror image of how you’re running your business?
Hopefully you’ve got some pretty good habits going on. But if not, be honest with yourself; are there any negative behaviours showing up in your business finances. What habits can you change now that could make a huge difference to your long term wealth? Your future self will thank you for it!