Entrepreneurs and personal finances

November 19th 2014 was Women’s Entrepreneurship Day (WED) founded by Wendy Diamond, in partnership with Global Entrepreneurship Week (GEW). The day provides an opportunity to celebrate, engage and empower female entrepreneurs.

Sadly, in many countries around the world, the vast economic potential of women remains untapped. Yet, if a woman is empowered, her family is empowered, and her community is empowered; this has significant implications for economic development and the eradication of poverty in developing economies.

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 will most likely have to commit personal savings, or may not have a realistic chance of making a go of it. Here are some issues that entrepreneurs should consider regarding their personal finances.

Keep them separate

Inevitably, your personal finances become inextricably bound up with your business and in a sense your business is almost an extension of you. More often than not, you will find that you will have to use your own money to fund both business and personal needs for what could be a significant period of time.

Keep your business and personal accounts separate and document all loans to the business and all profit distributions to yourself. It is usual for you to have bear start up costs and early operating expenses of the new business until you are able to raise funds. Put the right processes in place with clear accounting guidelines so that you can claim back those expenses when the company is in a better position to repay you.

How much of your personal funds can you deploy to fund the business. Set a limit and where there is a shortfall consider bringing in equity investors to supply additional capital to complement your contribution. You don’t 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 at the early stages, but it is important to build the cost of your services into the business model so that the unpaid salary can be converted into a personal loan and claimed at a later stage when the business can afford it. Your salary, no matter how meager, should be paid just as other members of staff, in a structured way to be increased over time.

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 chance, rather like a ship without a rudder. Financial planning involves examining your current financial status by gathering relevant financial information, organizing 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. Track your expenses by recording all your expenses for a period; this will help you to determine which expenses can be cut back.

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 to cover essentials such as utility bills, insurance and food. This should be set aside in a savings or other money market account where the funds are secure and easily accessible.

Diversify – don’t put all your eggs in one basket

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Regardless of how optimistic you might be about your business venture and its prospects, it is important to remember that most new businesses do not always live up to expectation; indeed entrepreneurial ventures have a greater chance of failure than success. If you put all your savings into a business and it is slow to take off or should it fail, 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. It is important that your investment choices are based on your objectives, your risk tolerance and your cash needs.

Plan for your retirement

Most entrepreneurs are so busy concentrating on building the business and completely ignore any 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 monthly sum no matter how meager, towards your pension savings. Over time you can increase it as your financial situation improves. Your staff should be registered with the Pension Fund Administrator (“PFA”) of their choice to secure their pensions.

Protect yourself and your family

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You are by far your most valuable asset. Many self-employed individuals fail to protect themselves against unexpected events that can change ones 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 will protect your dependents should you be unable to work and is very important particularly if you are the primary breadwinner.

As morbid as it may sound, it is also important to have an estate plan in place to ensure that should anything happen to you, your loved ones will be protected. If you die intestate, that is, without a will, intestacy laws will apply to your estate and this 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 to create a greater awareness and understanding of personal finance.