Business executives and owners alike struggle with their own personal finances. In some cases, it means that big salaries leave extra money on the table for frivolous spending. Rather than investing money for large capital gains later, funds are spent on material things. Some businesspeople believe that your status in society is based upon the material things you own. Money does not necessarily mean status. Having your finances in order is far more important than what you're showing off materialistically.
Many business professionals, especially small business owners, fail to separate personal finance expenses from business expenses. What this does is creates a mess at tax time. It also makes it nearly impossible for a businessperson to successfully run a business since business funds should not be used to pay personal debts. You have to be able to separate your expenses effectively. Your personal profits from the business should go back into it as an investment. This way, you are receiving a return on your own, personal investment.
Large Salaries with Disposable Income
A big problem for businesspeople is that executives and CEOs make far more than those doing the legwork. General employees do not have disposable income, which does not give them the opportunity to even become a business owner. Business owners often set salaries based upon industry standards rather than what their budget can really afford, which is often the same thing done in their personal lives.
An example here, when it comes time to retire, is that the top 100 CEOs in the world have put away roughly $49.3 million, averaging $277,686 in monthly retirement income. Those without disposable income often depend on social security income or small retirement pensions that barely make ends meet.
Forgetting to Reinvest
Reinvesting your money is important as a business person. You learn from spending your own money on personal finances that reinvesting in something has a higher chance of returning a profit on your initial investment. Take your home, for example, and the cost of new windows in retrospect to resale value and utility cost savings. The upfront investment continually gives small returns over time. The same needs to be done in a business in order to be successful. If your shareholders are not receiving returns on their investments, then you are not investing enough on your own.
Undervalue Good Personal Credit Ratings
Small business owners neglect to remember that their personal finance situation reflects on their business. If you do not have a good personal finance history, which has resulted in a poor credit rating and credit payment history, you must make changes. You cannot secure funding for your business without a favorable personal credit history. Lenders are not going to let someone with an irresponsible payment history borrow money for an even larger venture.
Structure Personal Spending
If your personal spending habits have no structure, it is difficult to structure the spending habits of a business. In essence, treat your personal finances like a business. Create spreadsheets, comparative sheets, and track every penny of your spending. A business owner needs to know where every penny is spent, you should adopt the same policy with your personal finance system.
Prior to making the decision to make a major purchase, consider the impact it will have on your life. Is it an investment or something you want but don't necessarily need? If it is not an investment or a way to add convenience or value to your life, it is unnecessary.
Understanding the Business' Financial Needs
Businesspeople often have the wrong idea about what a business' financial needs really are. It is impossible to understand the true financial needs of a business if your personal finances have no barriers. The business needs to be supported by itself, not by personal finances. If you drain your personal finances to fund a business, it may be a better idea to sell the business and cut your losses. Tying in personal finances with business needs can leave you in bankruptcy court trying to save your home.
You have to have a personal budget before you can really understand where a business's money goes. A business has triple the number of bills/expenses that a family does. Create a family budget based upon income and necessities. Then, create a similar budget for your business. You are likely to find that your business has more left at the end of the month than your personal bank account does. What it all boils down to is, if you have no general understanding of personal finances, you will have difficulties as a business person.