Pay yourself first: managing your personal finances as an entrepreneur

Starting a business is one of the hardest things you can do. Once you’re investing blood, sweat and more than a few salty tears in your business, it might seem only natural to continue to invest all of your money as well.

The line between your personal finances and your business’s books might not really exist.

But the truth is that you, your family and your business will benefit if you start separating your personal and business finances, protecting your personal cash flow, maintaining your personal credit, saving and investing outside of your own business and planning for how you and your business will handle your retirement.

Separate your personal and business finances

We get it; opening another chequing account, applying for a business credit card and disentangling your expenses (the printer paper you’re buying for “business” versus the printer paper you’re buying for your kid’s homework assignments) aren’t always at the top of a new entrepreneur’s priority list. But there are lots of reasons why separating your personal and business finances is important. Here are a few of them:

• You’re protected if your business goes under. This is probably the biggest reason to open that extra account, file business taxes separately and apply for business financing as a business.
• It’s easier to keep track of your business’s profitability, accounts payable and receivable and tax deductibles (that printer paper!). Better bookkeeping also makes it easier to see what areas of your business may need to be invested in and what areas may need to be pared back.
• You have a psychological distinction between you and your business. As an entrepreneur, it’s easy to feel like your company’s financial health is a direct reflection of you and your worth as a human being. Just being able to look at separate accounts and bottom lines can provide some healthy perspective.

Not sure where to start? Your best bet is to talk to your banker. Not only will they be able to help you choose the accounts and forms of credit that will serve you best, they may also be able to help you streamline your money management processes.

Protect your personal cash flow

It should be obvious, but sometimes it isn’t. As an entrepreneur, your personal cash flow is just as important as your company’s cash flow. After all, if you’re not stable, your business isn’t either. Take steps to ensure that—no matter what’s happening with your business—you’re going to be able to buy groceries and pay your bills on time. Consider paying yourself on a bi-weekly or monthly basis (just as you would any other employee of your business), automating your regular bill payments, taking out a low-interest personal line of credit, accumulating an emergency fund and making it a regular practice to review your personal finances.

Maintain your personal credit

Do we sound like a scratched record yet? Your company’s credit should not jeopardize your personal credit. While your personal credit—affected by things like your home mortgage, the lease on your car, and your credit card history—needs to accommodate your and your family’s basic needs, your business’s credit is ultimately there to help you develop and sustain your business to meet market demands. And while it makes sense to use credit judiciously to expand or bolster your business, it doesn’t make sense to put your whole life on the line in a market environment you have no control over.

Save and invest outside your own business

Though many entrepreneurs invest all of their extra money right back into the company, any investment banker will tell you that—whether you own your own business or not—your best bet is to diversify. Just as you don’t want to tie your personal credit to a business’s credit, you don’t want to tie your investing potential to the profitability of any one business. You’re better off covering your bases and resting secure in the knowledge that if your company’s value does take a dive, your personal savings won’t be decimated.

Plan for retirement

As an entrepreneur, planning for retirement necessarily takes a two-pronged approach: saving for your personal retirement and creating a succession or sales plan for your business. Again, many business owners put all their eggs in one basket, assuming that they’ll be able to retire on the proceeds from the future sale of their business. But you don’t know what the market will be doing ten, twenty, or thirty years down the road.

Small business owners can benefit from investing within a traditional RRSP, as well as within a tax-free savings account (TFSA); while you can save more within an RRSP, the money in your TFSA is easier to access in case of a pre-retirement emergency.

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We know you probably have many more questions. That’s why our entrepreneur strategists are standing by to help you conquer your most challenging finance (and all other business related) questions.