Editor’s note: This article was first published in May 2014. A salary of 1,500-2,000 euros a month is described as reasonably in line with the market “today”, meaning Spain in 2014.
There are many mistakes people tend to make when starting a business, and along the way as the business grows. Here we focus on the number one mistake that I personally keep seeing, above all among small business owners: mixing personal finances with business finances.
Many entrepreneurs believe their business is not profitable when, in reality, the only thing that is not profitable is their lifestyle, their excessive personal spending or their personal debt load. If we cannot keep these ingredients out of the business accounts, we are simply driving our company to suicide, even if it is making big profits. What serious problems does this mistake cause, and how can it be corrected?
To begin with, the entrepreneur must pay themselves a monthly salary. After all, they are a worker in their own company. At first, that salary must necessarily be low. In the months when profits rise, that extra profit or surplus cash should go to the company’s capital reserves, cash flow, or money set aside for future investments.
When we talked about refuge businesses, the kind of businesses that keep working during a crisis and are meant to give us a salary to get by, we saw that many owners consume their own products without keeping an exact record of what they themselves spend in the business. Sometimes that spending is higher than the business’s profit, and so the quarterly accounts do not add up.
I knew a businessman who sold sports nutrition products and was his own best customer, with the difference that he did not pay for the products. If his salary had been 1,500 euros, his consumption of his own stock would have far exceeded that amount.
For a business to work, the entrepreneur must pay for what they consume from it.
For most Spanish-speaking entrepreneurs, this advice is unthinkable. “Pay in my own company? Are you crazy?” Well, yes: you are crazy if you don’t.
Every entrepreneur has the usual expenses: mortgage, electricity and water bills, personal insurance, food, clothing and so on, and those expenses do not have to punish your business. So we set ourselves a salary (1,500 or 2,000 euros), which today is reasonably in line with the market. If you take any product from your business, pay for it. You can pay cost price or retail price, but pay for it. Only this way, when the financial year closes, will we see the real profitability of our company and be able to make decisions about it.
(Read: How much a business needs to grow to be profitable)
Managing our personal finances (and the business’s) this way will stop us from spending more on personal matters in a month when we have sold more. It also forces the entrepreneur to save for emergencies or personal expenses, just like any employee.
Along the way, it teaches us something we should already know: a business has good streaks and bad streaks. In the fat months we must make the most of it and save for the lean ones.
(Read: 7 mistakes we make with our personal finances)
We avoid problems with our partners (if we have any).
Often we are not alone in the business. We have a partner who may be a sibling, a relative or a friend. Both should have a salary and not take more money in the months when we supposedly can afford it, because in reality, you can’t.
(Read: 10 tips for choosing a business partner)
In short: you must keep your personal accounts completely separate from the business’s. To do that, pay yourself a fixed salary and stick to it. The salary will be higher or lower depending on how your company grows. It is the only way to respect our company and, at the same time, force ourselves to lead an orderly financial life, since the first step to becoming a millionaire is not living like one.
This mistake would be followed by the inability to delegate properly, believing that if the owner is absent the business will not work. Next comes what we consider number three, a lack of business ambition, where owners of small businesses stay put through the good times until those times end. The business career of many entrepreneurs begins and dies with the opening and closing of their shop.
Further reading
- Mistakes in small hospitality businesses: bars, restaurants and pubs
- 10 ways the rich think differently from everyone else
Featured image: Deborah Fitchett, CC BY 2.0, via Flickr.
