Just because an entrepreneur is successful in business, it does not automatically mean that they are good with money. A perfect example would be leading entrepreneur Elon Musk. In a court case back in 2019, the Tesla CEO confirmed that while he was worth more than $20 billion, he was cash poor, his wealth was tied up in stock, and he was illiquid. Unfortunately, this is not an uncommon occurrence amongst successful entrepreneurs. So what are the ten money management tips for successful entrepreneurs?
Managing personal finances
Entrepreneurs tend to be obsessive when it comes to their business aspirations, often to the detriment of their personal finances. Consequently, it can sometimes be very easy for them to lose track of short, medium, and long-term goals. Personal and business plans are very different, and, like bank accounts, they should be treated as separate entities. There have been many cases where highly successful entrepreneurs have been, to be polite, left wanting with their personal finances.
While entrepreneurs are often able to detach themselves from the “value of money”, preferring to focus on the value of a business, there needs to be a balance. Some of the more common goals amongst entrepreneurs include:-
- Owning a dream home
- Providing for their family
- Proving people wrong
- Inspiring others
- Being a success
There are many other issues to take into consideration, such as:-
- Paying down student debt
- Reducing high-interest debt
- Tax planning
- Pension contributions
- Estate planning
It’s important to have short, medium, and long-term goals regarding personal finance, which should be reviewed regularly. For example, entrepreneurs who take on a mortgage before paying off high-interest debt may at some point stretch their finances.
Record keeping is crucial
Entrepreneurs rarely make good accountants, and accountants rarely make promising entrepreneurs; they have different skills and different ways of thinking. While accountants will often be organized with their record-keeping, the same cannot always be said about entrepreneurs. Failing to file or losing simple pieces of paperwork can often create a nightmare scenario concerning taxes, sometimes resulting in significant penalties and fines!
Whether looking towards one of the more formal bookkeeping software packages or something as simple as Excel or Google Sheets, there is no excuse for lax record-keeping. Unfortunately, entrepreneurs don’t always maintain the same standard of record-keeping in their personal life as they do in their business life.
Updating records at the end of every month will work in some scenarios, but it can make a relatively simple task much more difficult in others. Maintaining accurate up to date records in their personal life allows entrepreneurs to focus more on their business. This is an area where they feel much more at home.
Sensible living expenses
There tend to be two different types of entrepreneurs, quiet retiring types who avoid the glare of the media at all costs. Others will focus more on their reputation and media profile to further their business in the short, medium, and long term. This polarizing of entrepreneur media exposure is an interesting phenomenon.
Living a high-profile lifestyle is expensive and, unfortunately, one which needs to be maintained to retain a reputation. The moment that entrepreneurs disappear from the headlines, retreat to the sidelines and fail to make the business journals attracts unwelcome and often untrue rumors. We only need to look at the tech entrepreneurs to see the considerable volatility in their wealth, profile, and standing in the business community. Therefore, they must live within their means at all times.
Separate business and personal expenses
Researchers at the Aalto University in Helsinki, Finland, cast a fascinating light on male entrepreneurs. This related to the adage that entrepreneurs “love their business” as they would a member of their family. Taking 42 men, 21 male entrepreneurs, and 21 fathers, the University reported some exciting findings.
Questionnaires were structured to measure an array of emotions between a father and a child and an entrepreneur and their company. They found that feelings displayed by entrepreneurs towards their company were unerringly similar to those of fathers to their children. These included joy, satisfaction, pride, and genuine love. Therefore, it is no surprise to learn that many entrepreneurs find it difficult to separate their business finances and their personal finances.
Business assets and personal assets should be separated at the very beginning. There are many examples where entrepreneurs have been forced to use their personal assets as collateral, but this is different. The tax obligations on business and personal wealth vary, as do the various allowances available. It is only by separating these two entities that entrepreneurs can even begin to consider short, medium, and long-term financial planning.
Education, education, education
As we touched on above, a modern-day entrepreneur’s characteristics are very different from that of an accountant or financial adviser. The previous section also highlighted how entrepreneurs see and treat their business interests akin to their children. Consequently, they often find it difficult to take advice from third parties – especially when it comes to finances. As a result, letting go can be challenging!
It is important to understand how actions are taken in their business life can impact their personal life. Having a general understanding of personal finances, budgeting, loan management, and income taxes can be invaluable. Many of these skills are also transferable to the business arena, enhancing and improving the skills of the modern-day entrepreneur. In the words of Benjamin Franklin:-
“If a man empties his purse into his head, no one can take it away from him. An investment in knowledge always pays the best interest.”
Monitor credit scores
In the initial stages of their career, many entrepreneurs will find themselves having to provide funding for their business, collateral, or acting as a guarantor. However, successful entrepreneurs will often go on to refinance their business, reducing their personal exposure and allowing the business to stand on its own. As the person behind the business entrepreneurs should constantly monitor their credit scores. Even prior to launching their business, they should be aware of their credit score and how this might impact their ability to raise capital.
On the flip side of the coin, a healthy business credit score can often open the door for short notice finance. Business suppliers will also monitor a company’s credit score. This can impact the supply line and payment terms. Simple things such as paying bills on time, tight budgets, and prioritizing debt repayments will help retain a healthy credit score.
Entrepreneurs with falling credit scores can find it difficult to turn them around quickly, potentially impacting their business.
Whether acquiring a business in their own name, part of a company, or a joint venture, entrepreneurs must have an understanding of business and personal taxation. There will be situations where it is more beneficial to acquire/start a business in their own name while others may best suit a company structure. As the regulations tend to change regularly, any up-and-coming entrepreneur should take professional financial advice.
It may be beneficial for entrepreneurs to retain the business in their own name in the early days, moving into a company structure further down the line. Of course, there are risks whatever route is taken, but it is crucial to understand taxation. Even though for many entrepreneurs, money is not necessarily their God, there’s no need to pay the tax authorities more than needed!
Always leave some headroom
Strict budgets in business can often lead to strict budgets in an entrepreneur’s personal life, but not always. While there can be a temptation to “live life on the edge”, it is essential to budget for unexpected scenarios. For example, you can bet your bottom dollar when an entrepreneur requires additional funding from their business; company cash flow will be under pressure. As a consequence, many entrepreneurs leave a degree of headroom between their expenditure and income.
The “20% rule” dictates that 20% of personal monthly income is placed aside, left to build up to cover unexpected expenses. Therefore, entrepreneurs can focus more on their business interests than their personal finances, allowing them to grow their business in the future.
Debt can be a friend
Entrepreneurs tend to be cast as “risk-takers” by the mass media and the general public. In some ways, this is an unfair image and does not reflect their ability to consider the risk/reward ratio. In an extreme example, entrepreneurship in the 1980s led to what is now referred to as leveraged buyouts. One of the most famous was the $31 billion purchase of RJR Nabisco using outside finance, i.e. debt. This was a massive transaction at the time, high risky but with potentially exponential rewards.
Entrepreneurs not only appreciate the risk/reward ratio, but they also understand while it needs to be respected, debt can be their friend. Many successful entrepreneurs have taken on personal debt to fund business interests. While they won’t “throw good money after bad”, they have an uncanny skill of visualizing potential short, medium, and long-term scenarios. As a result, very few businesses begin without a degree of debt, and very often, this can offer a shortcut to success if managed correctly.
KISS (Keep It Simple Stupid)
Whether looking at business interests or personal assets, taxes, or debt, the life of a modern-day entrepreneur can be pressurized and hectic. Consequently, many of them live by the KISS theory, Keep It Simple Stupid, leaving more time to focus on the issues that matter. Time is the most precious asset for an entrepreneur – don’t forget it and use it wisely.
Research shows that entrepreneurs think differently, act differently and react differently to the general public. Many of them have an unerring ability to make the right business decisions at the right time, but will often neglect their personal finances. Neglecting personal finances could at some point impact business finances and vice versa.