Juggling finances vital for success
WINNING STRATEGIES: Owners have no shortage of things to think about Entrepreneurs must ensure both personal and business matters are in order. That means savings, insurance, retirement planning, investments, taxes . . .
For small business owners, it’s a world of difference when it comes to personal finances. When you’re all wrapped in your venture, experts say, you can be so busy fussing about your company’s finances that you may not be paying enough attention to your own. But for owners of small- or mediumsized businesses, dealing with personal financial management is crucial, and it is important to avoid common trouble spots. Among the issues an owner needs to focus on are savings, insurance, retirement planning, investments and taxes. Many people use their own cash to finance the start- up or expansion of a smaller business, but experts warn against putting in to much.
“ The more of your own personal money that goes in, the more liable you are financially,” says Eileen Fischer, director of Entrepreneurial Studies at the Schulich School of Business.
People are sometimes reluctant to borrow money because they worry they could then lose some control over their business.
That’s important to recognize, Fischer says, “ but for those who have options, they should definitely be asking, ‘ How important to me personally is maintaining control and remaining independent of other potential investors?
“ Do I want my personal investments to be put at risk that way? Or would it be better to give up some control?” Working with investors might also increase your chance of success, she says.
“ Statistics show that businesses that are leveraging the money of others tend to go further,” Fischer says.
In part, that’s a question of dollars.
“ If you are limiting yourself to your own pool of financial resources, it tends to constrain how big you start,” she says. “ How big you start has an influence on how big you grow.”
There is also a symbolic value gained by having investors. “ The fact somebody is willing to put money in your business is a signal to others that it’s worth considering,” Fischer says. Owners of small businesses also need to pay attention to the personal assets they pledge
against
loans, and
the potential impacts, says
Gary Kaye,
a partner
at Ernst &
Young,
and the
market
leader of the Growth Markets Group for the company’s Toronto office. Kaye isn’t advising not to take loans against personal assets — just to be aware of what you’re doing.
And, he suggests, get some advice. “ Go and consult with a financial adviser and a lawyer to understand the true implications of what you’re actually doing.” One of the other areas small business owners sometimes don’t think about is the legal structure of the business, which can affect personal finances.
“ If you are a sole proprietor or in a partnership you are personally responsible for liabilities incurred by your business,” says Michael Donahue, program manager of the business incubation program at the Toronto Business Development Centre.
Consider incorporating your business. “A corporation is a separate entity under the law,” Donahue says. “ It serves to reduce the risk of your personal assets.”
Small business owners are also sometimes hesitant to seek outside advice when they need it, but that type of attitude can work against you.
“ If you’re excellent at a particular business, don’t all of a sudden pretend you are an expert accountant and financial adviser,” says Perry Muhlbier, an associate partner, enterprise practices with the Toronto office of KPMG.
“ You have to outsource these things to the experts — people that do this as their day job.”
Aside from not asking for help, small business owners sometimes make mistakes connected to how much they pay themselves.
“ Very often people who own their own business don’t remunerate themselves properly,” Kaye says.
“ You have to pay yourself for your own time. If you aren’t taking money out of the business yourself then effectively you’re leaving more of your own personal assets within the business.” And those assets are tied to the company’s success, or lack thereof.
Fischer says she’s seen the opposite happen — people who pay themselves too much.
“ If you leave the money in the business, you’re leaving it to grow,” she says.
Ultimately, it’s a question of considering two needs.
“ There may be a balance between personal well- being and business. Both have to be taken into account,” she says.