Managing Your Money
Most people, who live and work in the Caribbean region, have never been formally schooled in money management techniques and strategies in any of the educational institutions.
Nov 28, 2008A thin line between Personal and Business Finances
Most people, who live and work in the Caribbean region, have never been formally schooled in money management techniques and strategies in any of the educational institutions. Unsurprisingly therefore, there is a heightened interest among persons, especially in their adult working life, to pursue the prudent and sound paths which lead to successful wealth creation.
It is not uncommon that many entrepreneurs are challenged when having to decide how they should separate their business (self-employed) from their personal (domestic) financial needs. This article will explore how businesspersons should function in their decision-making and on which ‘buckets’ should personal and business related cash outflows and cash inflows fall into, in an unemotional manner.
In the context of financial planning, we find that most entrepreneurs are created from two origins. One is where they start a business with small but manageable personal debt which has no bearing on the business’ operations. The other is where they may have been working for sometime and accumulated a significant amount of personal debt prior to starting their business. These two scenarios have a profound impact on the financial decisions the entrepreneur will make in the business.
In the first instance, the owner, depending on the business’ ability to generate sufficient cash can possibly meet both personal and business commitments. However, if the business cannot generate enough cash to service the personal debt through the salary or withdrawals from its cash account, the owner may sometimes tend to ensure that the debt tied to whatever personal assets (things which they own) is satisfied first. This can be perceived as a natural course of action as the owner has spent many years accumulating these assets as compared to the recent start up of the business and therefore has intrinsically valued those more that the non-essential expenses related to the business.
It is at this juncture in the business life that there is a need to establish a structured, objective but strong decision-making mechanism. This can take the form of including some independent person who would assist the owner in the decision especially when he knows what the outcome should be. The reason for this is more morale support than anything else, but sometimes a very necessary action. There should also exist some assurance that through the development of the business modeling, there are objective and realistic cash flow projections to indicate with some degree of certainty that both the business and personal debts can be serviced in the stated time periods, and if this is not possible, then feasible alternatives should be developed.
It is hoped that this brief introduction to understanding the genesis of the challenges which entrepreneurs have while navigating that thin line between personal and business finances has been useful and thought-provoking.