Recently I saw a balance sheet of an entrepreneur whose business is doing a turnover of about US $ 15 mn and good profit. However, his personal Balance Sheet did not reflect any substantial investment other than his house.
The loan of another entrepreneur known to me become NPA. He was making a reasonable profit for many years. However, he did not have any investments outside his business to help him in trying times like this.
Both of them thought the best place to invest is where they have their control and who better than their own business can give a better return on investment. What is the point of investing somewhere else i.e. bank FDs or Equity Shares or Mutual Funds or Govt’s small saving investment schemes?
“College graduates spent 16 years gaining skills that will help them command a higher salary; yet little or no time is spent helping them save, invest and grow their money.” Vince Shorb, CEO, National Financial Educators Council
This kind of thinking could be dangerous. Especially for small and medium entrepreneurs. Entrepreneurs are savvy about their sales and marketing skills but when it comes to financing – business or personal they are casual.
Starting a business is easier. You can buy cheap and sale costly. You earn your profit but what to do with the profit is a specialised job. Many entrepreneurs fumble here. Many good businesses went out of business due to financial mismanagement.
According to S&P research, 75% of Indians do not grasp the basic financial concepts. These basics could comprise of the ability to manage an individual’s own finances to make the day-to-day. This 75% includes small and medium entrepreneurs too.
For large businesses, they can afford to employ CFOs and professionals to manage their money. But for small and medium entrepreneurs to invest only in own business is very risky.
Recently a business person approached me. He was in financial stress. He was implementing a project and since the bank’s money was taking time, he invested his own money (over and above the margin money) and working capital from existing business.
Now the existing business is facing a liquidity crisis, the bank is not supporting for diversion of fund and own fund is dried up. Everything in a mess.
This is the reason small and medium entrepreneurs need to be financially savvy when it comes to personal finance.
“The number one problem in today’s generation and the economy is the lack of financial literacy.” Alan Greenspan
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Why You Don’t Save?
The business will take care
They think their business will take care of the financial need of the family in case of an emergency.
They are so busy growing their business that they ignore personal finance completely.
Invest in own business
According to a survey, about 85 percent said they started their business by utilising personal savings, making financial management even trickier. This affects the way decisions are made as well as how businesses are run.
Imagine when businesses are started with personal saving where is a question of personal investment from business profit?
They keep investing in own business for two reasons. They have the control and returns are higher. They do not think of a scenario where business may face trouble.
Alan Roth of Wealth Logic says, “One common mistake that entrepreneurs make when investing is to invest too heavily in the industry that their business is in. They feel that because they know that sector so well, they stand a better chance of success. Far from guaranteed.”
Capital Starve Business
Most SMEs are starved for capital. Bank finance either takes time or is inadequate. Many times, their hyper-growth plans compel them to invest personal capital in the business. In all the scenarios personal capital takes a hit. Their personal investments are divested to invest in the business.
Many times, entrepreneurs’ greed to save tax and show less profit is a reason for their financial mismanagement. Unless your financials are bankable, the bank would not lend or lend less than required working capital.
One entrepreneur, I heard saying,” I would rather pay full tax and borrow from the bank than evade tax and let go growth chance for lack of capital.” This is smartness.
The point is business and personal finance are interconnected for SMEs, mismanaging either can create financial distress.
A survey finds, “Almost 75 percent of small businesses understand the need to educate themselves on financial management.”
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Why You Should Save?
Regular investment in secured avenues periodically is a prudent financial practice. Hope for the best for the business and prepared for the worst by investing in personal avenues like salaried employees do.
Life events like higher education or wedding of children need more money. Taking out so much money from the business can impact liquidity. Therefore, regular saving habits can take care of these kinds of personal expenses.
This is another important life stage. The business may not last forever. Save when you are earning for the retirement. Employee have their PF, what about your retirement funds? Invest regularly for all life stage events. Investing discipline is necessary for a happy retirement.
“I want entrepreneurs to know that the odds that their company will become a huge success–enough to meet all their financial needs through retirement–are against them.” Jeffrey Levine of Alkon & Levine
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Life Insurance investment is mandatory risk management tool everyone must invest in. Even medical insurance now becomes necessary. Cost of treatment is going up and remaining uninsured could prove costly even for entrepreneurs. It can have a sudden impact on your business capital if you are not insured.
“There is secret psychology of money. Most people don’t know about it. That’s why most people never become financially successful. A lack of money is not the problem; it is merely a symptom of what’s going on inside of you.” T. Harv Eker
Financial literacy in India is abysmally low. Entrepreneurs suffering from financial mismanagement is on the rise. It’s time to be alert about the business as well as personal finance. Make disciplined personal investment your new financial year agenda.
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