I’m writing this post in response to a great question I received from a very proactive and forward thinking entrepreneur, Pule Letswalo, whom I’ve had the pleasure of exchanging mails with whilst he was completing his financial education provided by Truth about Money.
His question: How do I manage my monthly budget with an unstable monthly income as a result of my business still being a start up?
Straight off the bat, my advice is to recognise that although you may feel very attached to your business you have to distinguish that you and your business are separate entities.
It is understandable as you and your business share the same deadlines and priorities, the key to your personal and businesses’ financial success will however hinge on your ability to know that you and your business each have your own money.
Where SME’s go wrong
They mistake their business account for their own personal banking account.
This amateur error is caused because most business owners are poor personal money managers just like their employed friends, where both parties want the good things in life, yet the SME owner needs to be reminded that he does not have the guarantee of R‘x’ each month.
It is human nature to want to match your expenses to fit your income, few are aware that although they may be earning more, they are still broke at the end of the month and their level of high interest debt is rising year on year.
This problem is also compounded for owners of small and medium enterprises (SME’s) by the fact that entrepreneurs are generally desperate to succeed because of the tough nature of starting a business and at the first opportunity, will buy ‘things’ like cars and other lifestyle upgrades to display their ‘success’. In most cases, all this proves is that the SME was successful at getting a loan, not building a sustainable and profitable business.
So, if a business owner starts to lean on his business to start paying off heavy interest on personal loans or tries to upgrade their lifestyle too quickly, their business is going to bear the brunt of this. They will start to spend their TAX and VAT money (which is not theirs) and begin running short of cash flow to buy stock or pay their rent and inevitably the business will close. Unfortunately, this is as a result of the business owners’ spending habits.
What should you do?
So my advice to you Pule, is to take the household spending plan you put together during your ‘Financial Independence short course’, and only pay yourself that amount of money every month.
In months where your business makes more than your personal monthly spending plan requires, don’t draw more. This way your business will be building up excess funds to reinforce its ability to pay you your standard salary every month. I promise you that a consistent lower salary will always be better than a big salary now and again (which you’ll blow anyway) with months where you are not making your account payments at home.
Oh, and in the months where you aren’t billing enough? You need to make sure you are out there selling more, finding referrals from your personal network or getting some overflow work from other established architects etc.
Lastly, it’s vital to explain this game plan to anyone who may be relying on your income. They need to know that things are going to be kept tight during this phase of your business development because you are focused on strengthening your businesses cash flow and at the same time committed to managing money like a wealthy person does at home.
And, if they don’t relate to what you’re saying then you know what to do…get them to www.truthaboutmoney.co.za and get them registered for our course at your local Boston City Campus and Business College which I’m sure the team at Truth about Money would be happy to pay for.
I hope this helps you and I look forward to hearing your response.
Author: Gary Kayle – Money Coach, The Money School