Entrepreneurs and their personal finances

DECEMBER 8, 2014 BY ’NIMI AKINKUGBE LEAVE A COMMENT

   

’Nimi Akinkugbe
| credits: File copy

An entrepreneur is faced with a myriad of decisions throughout the life of a business that have a significant impact on both the enterprise as well as on their personal finances. Starting a new business is daunting for any entrepreneur as access to capital particularly in the early stages, is limited. To build a business from scratch, to operate it and then scale it up, you are likely to have to dip into your personal savings. Here are some issues that entrepreneurs should consider regarding their personal finances.

One of the biggest mistakes new entrepreneurs make is not separating their personal and business finances. Inevitably, your personal finances become inextricably linked to your business and in a sense your business is almost an extension of you. Entrepreneurs often have to bear some of the start-up costs and early operating expenses funding both personal and business needs until they are able to raise funds. Consider how much of your personal funds you can afford to deploy to fund the business. Set a limit; where there is a shortfall, you may need to borrow or consider inviting equity investors to supply additional capital to complement your contribution. You do not have to own it all.

Pay yourself a salary. Whilst entrepreneurship requires great personal sacrifice, many entrepreneurs, in a bid to keep costs down, are reluctant to pay themselves a regular salary. It is true that a start-up business may not be able to compensate you fully for your input, experience and credentials particularly in the early stages, but it is important to put the right processes in place with clear accounting guidelines so that all loans to the business as well as profit distributions due to you, are properly documented and the unpaid salary and expenses can be converted into a personal loan and claimed back at a later stage when the business is in a stronger position. Your salary, no matter how meagre, should be paid just as other members of staff.

Develop a financial plan. A life without goals and specific plans in place to meet them will leave one drifting along aimlessly leaving the future to chances, like a ship without a rudder. Financial planning involves examining your current financial status by organising your financial records and documents and setting short, medium and long-term goals. Different goals require different strategies and investment instruments, so it is important that you plan carefully.

Build an emergency fund. It is important to be prepared for unexpected events so that you are not forced to have to borrow at exorbitant interest rates or liquidate assets in a hurry. Generating revenues in a new business can be challenging and an emergency fund will give you some personal liquidity, which can be drawn on when income is irregular. Ideally this should be enough to cover at least six months of expenses for essentials such as utility bills, insurance and food and should be set aside in a savings or other money market account where the funds are secure but easily accessible.

Don’t put all your eggs in one basket. Regardless of how optimistic you might be about your business venture and its prospects, it is important to remember that many new businesses do not always live up to expectation; If you put all your savings into a business and it is slow to take off or should it fail or be sued, you may be putting your personal and family finances in jeopardy.

Investing in any new business involves a significant degree of risk and you should diversify by spreading your investments across the different classes of assets such as cash, money market instruments, stocks or mutual funds, real estate and art; your investment choices are based on your objectives, your risk tolerance and your cash needs.

Plan for your retirement

Many entrepreneurs completely ignore any systematic long-term retirement planning. This is of particular concern as there isn’t the benefit of a retirement plan supported by an employer. It is important to set aside a regular sum no matter how meagre, towards your retirement savings that can increase as your financial situation improves.

Protect yourself and your family

You are by far your most valuable asset. Many self-employed individuals fail to protect themselves against unexpected events that can change one’s circumstances overnight. Investigate the various forms of health insurance that can protect you and your family so that you are protected and not forced to pay exorbitant medical bills if someone suddenly becomes ill. A life insurance policy is particularly important if you are the primary breadwinner, as it will protect your dependents should you be unable to work or in the event of your demise.

As morbid as it may sound, estate planning should be considered to ensure that should anything happen to you, your loved ones will be protected. If you die intestate, intestacy laws that will apply to your estate may not be in accordance with what you would have wished for your loved ones.

Seek professional advice. Most of us do not have the time or expertise to make the appropriate choices regarding investing especially as we simultaneously face the demands of building and managing a growing business. Seek professional advice so that investment strategy that suits your unique situation and risk profile can be created for you. This will ensure that the appropriate investments are in place for your changing circumstances. By putting your personal finances in order and planning for your future, you will create some balance in all aspects of your life.

Nimi Akinkugbe has extensive experience in private wealth management. She seeks to empower people regarding their finances and offers frank, practical insights into personal finance.

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