Six tips on how SME owners can improve their personal finances

A couple of months ago I wrote about how people who start a small business, especially if they are middle aged, will probably end up happier than if they’d stayed in a full-time job working for someone else — but it would be unlikely they would end up wealthier.

In the article, I looked at a study, titled ‘Late career entrepreneurship, income and quality of life’, that surveyed people in the 50-67 age group who had left their jobs to start a business from scratch.

Being able to do what you love, setting your own agenda, and not being at the mercy of corporate machinations were high on the list of positives noted in the survey for self-employed people and small business owners.

However, the study’s main finding was while quality of life increased, bank balances usually didn’t. In fact, they would have been financially better off staying in their corporate jobs; miserable maybe, but with more money in the bank when they retire.

“We found that switching to a new job increases the quality of life index compared with staying in the same job. However, the increase experienced by late-career workers switching to entrepreneurship is significantly larger, on average, than those experienced by all others. That is, transitioning to entrepreneurship increases quality of life significantly more compared with staying in the same job or switching to another paid job. Yet switching to entrepreneurship meant, on average, a significant reduction in income not observed in the other groups.”

I’ve worked with hundreds of small business owners and this question keeps popping up: How do I run the business I love but still manage to make enough money and create enough value so that I can be financially secure and comfortable?

Small business owners have to think about questions like how do you build a business that can see you through tough times? How do I grow sustainably? How do you make sure you take care of your personal financial wellbeing too?

Recently I had the opportunity to talk to David French, who is the founder and chairman of personal and business financial advice company The Investment Collective.

In his 20 or more years of experience as an investment adviser, David has advised scores of small business owners on how they can get the most out of what they do. I thought what he had to say makes a lot of sense, especially when we got talking about why so many small business owners fall short when it comes to personal finances.

David says it very much comes down to how you think about, structure and plan your business.

“The short answer to this is that it depends what you consider to be a business. Undertaking your favourite task 24 hours a day, discounting your rate and employing no help is not a business. It’s a lifestyle choice, but not always a good one,” he says.

“Buying a business that supports you from the till, but without generating a return on the money invested is not a business either – it’s you just buying yourself a job.”

This struck me as very true. I see it so often with entrepreneurs who pursue their passion and then grow a business without putting in place basics around financials and separating their personal and business finances. We all love underdog success stories about small business owners who put it all on the line and come out rich, but that’s not what happens in the majority of cases. And in a significant number of cases, small business owners end up losing a lot more than just their business.

It’s great to love what you do and be passionate about your business. It’s even better to do that while building something of lasting value at the same time.

Here are David’s six great tips on what to do if you are serious about building a business:

Invest in the business

Get your accounts in order – you cannot run a business without accurate financial data

• Make sure you can understand the accounts – they might comprise boring numbers but as far as the performance of your business goes, they are the only story that matters
• Employ an assistant – a smart one, with skills different, but complementary, to yours.  That is, if you are a jeweller, your first hire should be a competent bookkeeper who likes jewellery, not an apprentice jeweller. If your assistant is your partner, then make sure they are paid properly.

Spend time making a business plan

• Think of what this business should look like, now and in the future, and write it down
• Build the financial structure and business model around that vision
• Make sure you plan to have holidays/breaks/leave

Get your structure right

• Should you be trading as a sole trader, partnership, unit trust or company?
• Each has significant legal and tax consequences, and getting it right in the beginning will save you a lot of time, effort and money later on.

Employ good people and train them

You can grow much quicker and have more fun if you delegate to the right people.

Make sure you plan to finance the growth of your business

• Most businesses do not go broke because they don’t make a profit, they go broke because they cannot finance themselves.
• You also need good financial records and a business plan to attract funding.

Keep personal finances separate from business finances

• Pay yourself a salary including superannuation.
• Make sure your plan includes the business generating a return on the money that is invested in it, as well as a return for your labour/skills.

(Disclaimer: The Investment Collective is a client of Bendalls.)