Balancing personal and business finances as an entrepreneur

Credit to Author: Shalini Dharna| Date: Tue, 21 Mar 2023 15:39:05 +0000

When you are employed, financial life seems so much easier. You know when you’re getting paid, and how much, and everything goes towards your personal expenses. But all this changes when you become an entrepreneur. You are now responsible for earning your income in a very different way. Not only do you need to find clients, provide a service, you actually need to collect payment. Plus, in addition to business expenses, you still have a personal life that requires money. Here are three tips to balancing your personal and business finances.

1. Budget yourself INTO your business

You’d be amazed how many people go into business without a plan on how to pay themselves. Or worse, they create an operating budget that does not even factor in paying themselves! Unless you have already had a side hustle and enough business to replace your day job, odds are you are going to enter the world of entrepreneurship and must make adjustments to your personal life for a while. You need to understand that you will not be bringing in the same amount of money as your 9 to 5 job right away so, you need to plan for how you are going to pay yourself in the interim. This is where a startup loan comes into play!

A lot of startups are afraid of taking on debt for their venture – what if it does not go well, how will you pay it back? A startup loan is important to help you until you have consistent income.

Not to mention, when you pay yourself from your business, your passion for being an entrepreneur increases! It gives you confidence and power versus working (for yourself) for free and adding to the personal financial burden in the interim.

2. Do not mix business and personal expenses

There are actually two reasons you don’t want to mix business and personal expenses.

The first is from a bookkeeping perspective. Only your business expenses are eligible for write offs, and when you are mixing business and personal on the same credit card or from the same bank account, it can actually add unnecessary work in your bookkeeping process. Now your bookkeeper needs to question every single receipt as to whether it is business or personal. But if you just keep the business and personal separate, the bookkeeper is clear that the expenses are all business related and this can eliminate some of the questions and necessary follow up.

The second is from the perspective of knowing your numbers. When I do someone’s books and tell them they made a profit, I often hear “well, where is it?” Managing your cash flow is one of the most challenging aspects of being a small business, especially a new one. When you mix your business and personal finances you no longer understand whether your cash flow crunch is because of business deficiencies or personal overspending. A budget will help but keeping separate bank accounts and credit cards will really help you see the cash flow.

3. Don’t wing it, strategize it

Accountants and lawyers seem to be two service providers people don’t want to invest in – until it’s too late. When you become an entrepreneur, you have more options than an employed individual. Seeking guidance on how to best set yourself up for success can quite literally save you thousands of dollars. Choosing when to incorporate isn’t about a magic number; it’s a situational analysis that involves both legal and tax advice. Sometimes we incorporate for legal reasons even if the tax reasons aren’t applicable because the set up makes sense and can save you hardship later (i.e. separation of liabilities from personal assets, avoiding S85 rollovers). Sometimes we incorporate for tax reasons. A corporation by itself will not afford you tax savings, however, you need to strategize to use it properly.

While it may seem overwhelming to start a business, especially taking on the financial responsibilities that come with it, the key is having systems and processes that help make your life easier. Invest some time to ask questions to set yourself up for entrepreneurial success!

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