Entrepreneurs are real strength of the society providing value to different stakeholders; but when it comes to their own personal financial planning, many times they tend to take a rudimentary and product centric approach.
1. Differentiation between Personal Finance and Business Finance:-
This is biggest hurdle SMEs face while operating their business. They don’t consider themselves as a separate entity from business. There is no clear cut distinction between their personal finance and Business finance.
How it affects them
- Their Personal goals and requirements are at the mercy of their business performance. For instance, this means that their next foreign trip is dependent on how their business is performing at that particular time.
- It becomes very difficult for them to shift the business on auto pilot mode and achieve a state of freedom.
2. Ignoring Personal Financial Planning:-
Many times entrepreneurs are so occupied with their business that they totally ignore personal financial planning. They think that their business will take care of all their needs. But we all know that businesses can go through bad phases and when that happens they are caught off guard.
3. Too many loans:-
Business people are ambitious but many times they forget the difference between ambition and over ambition. They take huge loans for their businesses which may create lot of cash flow problems for them. Over leveraging (too many loans) the business can seriously hamper the Personal Financial Management of the business owner.
4. Inadequate insurance against the risk of death:-
Most Business people buy insurance as an investment and pay huge premiums for their life insurance policies. There is no assessment of actual life cover required.
Also, in case of any eventuality to the business owner there is no plan to protect the family from creditors.
5. Low priority for personal investment:-
A businessperson thinks that business is the best place to invest money. That is all right but it’s like putting all your eggs in one basket. As most of the investments are made in the business they are not liquid; so they reflect on the balance sheet but they are of no use. This is the reason businessmen don’t have structured Investment portfolio in place.
6. 4 Action steps for entrepreneurs:
- Differentiate between Personal Finance & Business Finance.
- Create a solid Financial Risk Mitigation Plan in case anything happens to the business owner.
- Start investing in other avenues apart from your business like Equity, Real Estate, Gold, Art work, etc.
- Prepare a scientific Financial Plan from a qualified advisor (Preferably (CFPCM).
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