Most people view their business to be a completely separate entity from their personal finances, and rightly so. This is generally true from a legal, tax, and accounting standpoint, whereas your business operations and finances should be separated from you personally. However, most small business owners are completely dependent upon their business to support them, as they feed off each other. So how and why should you strengthen your personal finances to increase your profits?
Why:
The business won’t starve: By withdrawing every single penny of profit from your business, it will make it much harder to invest in technology, equipment and capital improvements, and people. One of the main reasons that businesses fail is due to a lack of capital.
Increased profitability: If you have a large personal expense that is coming due, such as your mortgage, then you are more likely to take on less profitable customers, jobs, or may even sell your products at a discount due to desperation.
Better business decisions: It’s no secret that people make better business decisions when they are not feeling stressed or anxious. A common example of a bad decision is to cut expenses that support the main operations of a business to save a few pennies, but it ends up costing you dollars of revenues.
How:
Decrease your personal spending: There are numerous ways to decrease your spending, including groceries, dining, entertainment, taxes, auto, clothing, and virtually every category of spending. Some of my other posts will give you ideas regarding cutting expenses, but a few tips including: using cash more, cash budgeting (aka the envelope system because almost no one actually prepares a real budget), reviewing all of your “necessary” expenses, and delaying expenditures/gratification.
Increase cash reserves: Most people are poor at this (no pun intended), including those who save well for retirement. Savings should be allocated for short-term needs, such as emergencies, mid-term needs, such as for a house, and long-term, such as retirement. The easiest way to start saving is to allocate a very small percentage of every deposit that you make in your personal account towards a separate savings account. You can even start with 1%, just to get used to doing this and you’ll quickly realize that it is not that difficult. Over time you can increase your savings rate as you increase your business profits.
Reduce debts: Similar to increasing your cash reserves, you can start with applying a small percentage of every personal deposit towards your debt balances. The big question is which debts should be paid down first. Since finances are very behaviorally driven, then one technique is to start with the smallest debts first while ignoring the interest rate. The reason for this method is because it creates a sense of accomplishment once a debt is paid off, and will motivate you to continue moving forward.
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