I have a relative who’s been running a lucrative business for a couple of years now. But, even after years of operating, he still struggles to pay his staff their salaries and wages on time. While there may be many reasons for this, my guess is that managing small business finances is not his greatest strength. And here’s why:
He says it’s because of the nature of the business or industry he’s in; his clients, mainly government departments, never ever settle their invoices within their agreed timeframes. But, then, he also drives a very fancy car and is grossly generous towards his family and friends. It turns out that his car installment is often paid from the business account, and he has a friend who owes him a large chunk of money, which he had loaned him from the business account. Of course, that would make it difficult for his business to make ends meet. I know a lot of small business owners are plagued with the same issue in that they mix personal and business finances, which hinders business growth.
If you’re a sole proprietor or have an informal business, it’s understandable that your business and personal finances are one. If, however, your business is a legal entity on its own, if it’s registered, and if you have people working for you; your business and personal finances must be separated.
When I was younger I started a business, and killed it within two days, because I ate all my stock (it was popcorn). Using your business finances for personal reasons is the same thing; it kills your business instead of helping it run efficiently and grow. Instead of using your profits for personal expenses, re-invest the money back into the business.
Pay yourself a salary, wage or commission
To avoid dipping into your business’s accounts, pay yourself bi-weekly or monthly and use that money for your personal expenses. If your salary/wage or commission doesn’t cover your personal expenses, then adjust your personal expenses, don’t kill your business.
I run two side hustles with friends. We all have secure, monthly incomes, so we’ve decided that we won’t get paid just yet. All the money we make (except for this one time we went shopping with our first pay… bad decision!) is re-invested into the businesses. So, if you can survive without getting paid by the business, do so.
Get a business bank account
Only use the business bank card and account for business transactions. Don’t ever use them for your personal expenses.
Keep separate business and personal financial records
Successful business owners keep daily records and use them to make wise business decisions. Make sure that you keep records for both your personal and business finances. Keeping a record of your personal finances will keep you from funding your personal expenses with your business’s money.
Claim from your business
If you ever use your personal funds for business purposes, keep a record of that and make sure to reimburse yourself from the business’s account.