Ploughing back surplus cash into business can derail one’s personal financial plan.
Raju Krishnan, 42, has worked hard to grow his catering business in the last seven years. His company’s balance sheet speaks volumes about the growth and success, he has achieved, in his business. However, Krishnan is not really spreading his risks since his personal financial planning overlaps financial plans for his business.
Individuals like Krishnan consider their business and its assets as their only investments. Their business plan is the same as their financial plan. Their monthly credit card bills, utility bills, vacations and most categories of expenses are met from their business accounts. The latter is treated at par with a bank ATM. They equate business growth with their personal assets or wealth.
But such an approach can have serious repercussions. It is imperative to have a clear demarcation between the business capital and the personal balance sheet. With the business environment subject to rapid innovation, it has become necessary for owners to maintain their own balance sheets, in addition to their business one. Growth in personal net worth is equally important to growth in business.
Every growing business poses some new needs, which can be perceived as a challenge for the owner’s personal growth. Some of these include:
- Increasing responsibilities might make the owner integrate new partners. That involves sharing of profits and sharing the business assets and growth.
- Relying purely on one’s business to satisfy personal goals could lead to an imbalance in financial life. Diversification into financial instruments would not only help in increasing the owner’s net worth but also help in spreading the risk. Every business will have its own high-normal-sub-normal growth periods. Re-investing all the profits of the business back into it could keep the capital as well as the profits earned on it at the same risk. Diversifying the returns from a business into other investment avenues will be helpful at all times, especially in case of a slump in the business.
- Every business would certainly face cash crunches. These events can easily coincide with emergencies in the owner’s personal life. At such times, it would definitely help if the owner has an emergency fund in his personal name to avoid a double-whammy on the personal and professional front.
HOW TO STREAMLINE
It is often argued that financial planning and discipline in investments is simpler in the case of salaried people, who have a fixed take-home pay. It need not be so. If every businessman adopts at least three of the five strategies listed below, achieving a near-perfect balance between business and personal finance growth would be possible:
- Have a plan. It is important for a businessman to chalk down goals and objectives for personal life, the same way as for the business milestones. Once done, this financial plan would chalk out the road map, highlighting the gap between the resources available and required. The plan will have to devote special attention to the skewed cash flow pattern that may be possible in such cases.
- Based on the above plan, the businessman and the planner should chalk out the corpus required for the different objectives and set a disciplined savings pattern for it. It is possible that some savings could be made on a monthly basis and some quarterly or half-yearly, depending upon the cash flow pattern. Having set this pattern, it will prevent the surplus cash generated from the business to be ploughed back to the business.
- It is extremely important to set aside two emergency funds by the individual -- one for the personal emergencies and one for the business purpose. This step provides the businessman with a much-needed cushion of having ready access to funds for the business in case of certain events not going in his favour. This measure could also help the owner from taking up expensive short-term borrowing (both formal and informal).
- As with the business, the individual has to make it a practice to draw out a personal balance sheet, tracking the inflow and outflow of funds during a particular year and summarising the networth. At the end of every year, the balance sheet and networth statement could help in tracking the progress as compared to the original plan.
- The owner could look forward to the stake in his business as his contribution for his retirement. Being a very long-term goal, the investments to be allocated for this objective could be the highest risk-bearing instrument. So, an owner’s capital invested in business would be easily one of the best of investments for retirement.
A truly successful businessman would be the one who is not only successful in his business but also has been able to build his own financial networth with equal care.
The writer is a certified financial planner