Before Going Into Entrepreneurship, Are Your Personal Finances In Order?

It is said that about 3 million South Africans lost their jobs in 2020 due to the pandemic. One can predict that a good portion of those who were retrenched, replaced and reappointed to lower-paying jobs have at some point in time considered becoming entrepreneurs and really taking control of their financial destiny.

As commendable as the attempt at employing capital to create value is, it’s not enough to listen to a few motivational talks here and there and walk through the valley of the shadow of “financial” death caused by poor financial habits and acumen. We often spend a substantial amount of time in the cloud or euphoria of building the next billion-rand company, living the nice life yet our personal finance habits take us nowhere but to negative bank balances and endless letters from our creditors.

Your financial personality will be reflected in your business

If you want to have a venture capitalist, government agency or even your mom, invest in your business, you must display a sense of good financial acumen. A founder with a higher proclivity to make good financial decisions in their personal life will probably leave that imprint on the financial department of their business. Often at times, entrepreneurs who have formed a toxic relationship with money in their personal life and have used it as a status symbol will impart that belief into the financial management systems of that company.

Instead of ploughing back net profits after tax and interest into the business to form other value-adding projects, the entrepreneur will rush to sign a lease agreement for an office space that will leave the business insolvent or purchase luxury company cars that, if assessed on an empirical basis, aren’t needed at a start-up level.

Scrutinize your financial character very carefully. If you don’t, the bank will before they decide if it’s safe to approve the bank loan. Potential funders will look at your credit score, credit cards, personal loans and your income streams. If all is not in order, you have to spend more time investing in your personal finances before you start your business. To learn more about your financial character, subscribe to our newsletters and other platforms because we’ve got an exciting tool coming your way soon that tells you all about your financial personality.

Foresight to separate personal and business transactions

My 9-5 usually involves me reading quite a bit (in fact, a lot) of business plans and financial projections made by entrepreneurs that want funding from government agencies such as SEFA and the NYDA. The most common mistake I’ve seen is the inclusion of personal expenses in financial statements and exceptionally high operating expenses that are not justifiable, caused by not being able to identify what is a personal and business expense, as well as the overall ability to be critical about whether an expense is necessary at start-up stage.

If I was privy to the personal finances of these clients, I could say with confidence that they have accumulated bad financial habits that have seeped into their business plan. If your own personal expenses are running through the roof, guess what? You’ll probably wipe out your gross profit as well by exceptionally high operating expenses. Learning to keep your personal expenses at an appropriate level by budgeting, saving, finding reasonable prices and tracking every purchase is crucial for the success of your start-up.

You must have the foresight to create management accounts, capital expenditure budgets, look for reasonably priced suppliers and keep that expense for your favourite dress OUT of your business monthly expenses. All of this needs you to invest in financial literacy content as much as you can. The more you increase your financial literacy for your own finances, you’ll start to have the wisdom to manage your business’ money wisely which is crucial at the startup phase.

Long-Term and Non-Current Investments In Your Personal And Business Life

Large companies often invest cash surpluses into long term assets known as non-current assets to build up their balance sheet and stay solvent. While it’s very easy to take R40 million and squander it on holidays, houses and exorbitant salaries, understanding the mere definition of an asset, solvency and other financial concepts is needed-hence your time should be spent increasing your financial literacy. Look into your personal finances and ask yourself if you’ve built up a solvent financial profile. Should your day to day income be ceased, do you have secure long term assets that can generate economic benefits for you? These are the same lines of thinking that you must have as an entrepreneur.

Spend more time working on yourself, your financial fitness and acumen and then your endeavours will begin to reflect that growing pool of knowledge. As an entrepreneur, you leave a stamp on your business. Leave a stamp of financial savviness, understanding and sound financial practices.

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Author: Sthandiwe Msomi

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