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Small Business Secrets: Practices that Aid Personal Finances

Posted on May 20, 2015 by Tiffany C. Wright
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Financial management is financial health

Managing your money like a successful small business owner can enhance your financial health.

There are a number of activities that small business owners routinely engage in out of necessity. For example, for successful small businesses, cash is king. You can be profitable yet have very poor cash flow because you did not structure the timing of your inflows to exceed your outflows. Most ongoing successful business owners have developed the ability to forecast and manage cash. Learning to do this and other activities bodes well for individuals and improving both their personal financial management capabilities and their actual personal finances.

Managing Cash Flow

I plan out my cash flows 12 weeks in advance. If I see that I’ll have a large outflow in a given week, I’ll make adjustments in other weeks to ensure I have the cash or I’ll use our credit cards or line of credit. But I make sure that I can pay these down within 1-2 months. In addition, I plan out capital expenditures 1-2 years in advance. That way, I can explore ways to fund those expenditures in advance such as a lease, term loan or (more rarely) one or more investors.

People can use this same planning and discipline to manage their personal finances. Treat those major vacations and large purchases like capital expenditures. Know your personal inflows and outflows and timing and only use your credit cards to cover the gaps or to allow time for more cash to come in before you pay out (i.e., you delay the cash outflow by 25 or more days by putting it on the credit card).

Poor financial management

Poor financial management is evidenced by overdue bills, maxed out credit cards and little cash.

No Reliance on One Income Source

Another thing is, as a business owner, I try not to place more than 5-10% of my business with any one customer. Sometimes a customer may jump to a much higher percentage (which is usually great!), but then I focus on expanding customers or the business to again lower that percentage. Most non-investors and non-business owners have one or two sources of income – their own and that of their spouse, if they’re married. To generate cash from other sources, you can invest in real estate, invest in bonds, invest in stocks that pay dividends, freelance, have a part-time job,… The point is to reduce your reliance on your paycheck through multiple methods so you don’t experience a massive shock if you lose that paycheck.

Periodically Extract Money and Invest

Finally, I am currently growing my business. However, with previous businesses, I pulled money out of the business periodically and invested in other assets – other businesses, stocks, and real estate. I want to build the value of my business by retaining some profits but I need to reduce the risk of a negative impact on my personal finances if something unexpected happens and adversely slams my business. You can benefit from doing the same personally. Take money from your paycheck and invest it in something, preferably, multiple assets that you know and are comfortable with. You increase your net worth over time and reduce the likelihood that one asset will collapse and wipe you out financially.

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