Running a business affords a business owner a certain level of flexibility that working a 9-5 job does not. This flexibility can look like having more time for yourself and having the freedom to make decisions without prior consultations with anyone.
But while this flexibility exists, business owners do not have the security of a salary that a 9-5 worker does. This means that while a 9-5 worker can expect a defined salary amount at the end of every month, a business owner’s earnings are dependent on how much sales they’re able to make.
Hence, while workers can make certain monetary decisions or goals around their salary, business owners cannot, especially at the early stages of the business where sales might not be frequent or consistent.
In this blog post, we’ll be discussing tips on how to manage your finances as a business owner.
As a business owner, understanding that the first few months might be tight financially is the first step in taking better control of your finances. This knowledge will make it easier for you to stick to some of the tips we’ll be discussing.
1. Cut back on expenses
This is pivotal especially if you’re transitioning from earning a fixed salary to earning based on how much sales you make. The less you spend on yourself and the more least costly methods of doing things you discover for your business, the more money you have to re-invest into your business to fuel its growth.
Go through a copy of your bank statement or alerts and weed out unnecessary expenses. Even if they might not be unnecessary, as long as it’s not a need that must be fulfilled at the moment, you can cut back on it till you can afford to spend on that again.
With a lean salary that might not be consistent like that of a 9-5er, you want to ensure that spending is as minimal as possible.
2. Create a budget and stick to it
Both for yourself and your business, create a budget and stick to it. While some business decisions might require significant monetary risk where you invest more than you might be able to afford at the moment, don’t make a habit of spending above budget.
In the budget, be sure to list out all needs and detail clearly how much you can afford to spend and on what exactly. This will help you settle needs like feeding, rent, etc and show clearly how much you can spend on other nice things that aren’t a core need.
3. Separate business funds and personal funds
The 3rd tip to help you better manage your finances as a business owner is to separate your business money from your money. Having 2 accounts is a must. Separating your business and private funds will help you determine and see clearly what your business financial situation looks like and how to make it better or how to fix it if need be. It will also ensure you aren’t dipping into business funds to spend on personal issues.
Your business earns a profit to help drive re-investment in itself. If you’re dipping into that to spend, you’re stunting your business growth in the long run.
Separating both will give you more clarity on how to approach and manage your finances, and also help you understand your business finance needs and how you can move forward.
4. Fix your salary
While there is no fixed equation to help you determine exactly how much you should pay yourself as a business owner, there are certain factors that should influence that decision.
i. Is my business making any profit?
Profit and revenue are 2 different things. Revenue is simply any income made at all, while profit is the net income after expenses have been deducted. Do the maths and figure out how much your business makes. Learn more about revenue and profit HERE.
ii. How much is made every week on average?
After you determine how much profit you make on every unit of a product that is sold, you want to calculate how much the profit accumulates on a weekly/monthly average.
Once you know that, you can estimate how much your business earns per month or week (depending on how you choose to pay yourself) and split the profit across paying yourself, re-investing in the business and paying staff if any.
You can decide to re-invest up to 50 or 40% of total profits into the business and split the rest across paying yourself and staff if you have any. In the early stages, most business owners re-invest the total profit into the business, but this isn’t advisable if you have no other form of financial support. Re-investing without having money to support yourself increases your likelihood of dipping into your business finances.
5. Save and invest
This tip is necessary for everyone; both business owners and 9-5 workers.
Every month might not go as expected sales-wise, so cultivating a culture of saving from what you have will help you through a dry and slow sales season. The 30-50-10 rule is a personal finance tip that you can try.
This rule simply states that:
30% of income should go into savings.
50% should go into expenses.
10% should go into investing.
Building an emergency fund is necessary as no one can foretell the future. For example, the covid-19 pandemic that swept through the world in 2020 meant that many businesses were shut down for months. In cases where the business owner had no savings or financial support, they had to survive on business capital and some of those businesses did not make it out of the pandemic.
Having an emergency fund or savings stash as a business owner will give you a financial buffer for seasons of slow sales.
6. Minimize personal debt
As a business owner, minimize taking on any kind of bad debt. Bad debt is any debt taken to spend on activities that will ultimately not generate income or pay for itself. Borrowing to make purchases like a spa day is an example of bad debt because it doesn’t generate any income for you, neither is it an investment.
This tip is very important as it is very likely that business owners who take on personal debt are more likely to dip into business finances to pay it back. Having personal debt can pull your focus away from your business because you’re trying to pay that off, and in the early stages, your business needs all the focus it can get from its owner/CEO.
Minimizing personal debt will reduce the owner’s stress levels and help with a focus on the business.
These are some tips to help you better manage your personal finances as a business owner.