Know Your Numbers! That is the first thing I tell business owners when it comes to generating cash flow. Many business owners do not have a finance background and can find business finances to be complicated and intimidating. However, I encourage all business people, particularly those with SMME’s to start at the basics, to track their business finances, to know where every single cent goes and why it goes there and to know the return on investment that every expenditure has. Although I advise business owners to know their numbers, I have realised that before they know their business numbers, they need to first know their personal finance numbers.
You cannot manage your business finances well until you have mastered your personal finances. Your personal financial behaviour can become a hinderance to you when you are looking to get investments into your business or loans from a bank. One of the main reasons for this is because the principles you apply when dealing with your personal finances will be the same principles you apply when dealing with your business finances. If you’re an investor and you see that someone is reckless with their personal finances, will you trust that same person to manage your money as an investor of the business? Probably not. And people often wonder why financial institutions do not loan them money or see the potential in their businesses. It’s not because banks are discriminating against you, or that you’re too black or too white. Simply put; banks care about the bottom line, they care about making money and if you can take money but money does not grow in your hands, then you are not a safe bet.
Like most things in life, money is governed by principles. For those who want to learn how to build money sustainably, those who want build wealth over time, this is a non-negotiable: you have to learn and apply the principles of wealth generation. There are several principles that govern money; however, I want to highlight 3 basic laws that are easy to learn but difficult to apply. If you can master these in your personal finances, you have just begun the journey towards financial freedom.
1. Make
Generate Money. That is the first step. You need to find a source of income and the amount is not the most important factor. Obviously the more you make the more quickly you can meet your financial goals, however whether you’re making R3000.00 or R30 000.00, you need to apply discipline with both.
2. Protect
Insure the money, preserve it. You do this by protecting the money itself but also by protecting yourself as the individual who is making the money and this can be done through getting an affordable life insurance policy. You need to also keep your money for yourself. Think about how hard you work to make money, what percentage of that money do you keep? In South Africa, FNB has estimated that it takes 5 days for the middle-class to spend up to 80% of their monthly salary. Whether the money goes towards; rent, car payments, living expenses etc. It doesn’t really matter, the point is that they generate money but they do not keep their money, furthermore, they do not have disposable income at the end of the month. Banks give money to people who do not need it and clearly the middle-class need it but can’t manage it. A person who cannot manage their finances might end up broke or in debt. A business that cannot manage its finances will fail.
Frugality is a skill in business. Business owners especially in the ICT space are always talking about equipment. But can the business afford the equipment? Not only purchasing it but maintaining it and insuring it? These are questions that entrepreneurs who want to buy equipment need to ask themselves. If you cannot afford to purchase and maintain something, you cannot afford it. And when it comes to insurance, the rule is simple: If you cannot afford to lose something, you need to insure it. In your business everything rises and falls on you. You are responsible for all the business expenditure, therefore, your discipline in keeping money is what will protect your business from potentially closing down.
3. Multiply
Money is a seed. If you eat all your seeds, you will have nothing to plant and no future harvest. You can eat your seeds but do not eat all of them. In order to multiply money, you need to allocate a certain portion of the income towards investments. This enables the money to go to work for you. Money that is invested generates more money and builds your net worth. When you have little to no financial knowledge, do not allow yourself to be duped by people who talk about money and sound wise but have no substance. Avoid scammers and digital currencies that have popped up out of no where by educating yourself. It is better to invest your money in something that has stood the test of time and is safe and reliable than the latest fad.
You are not your business but your business is an extension of who you are. Your personal discipline will show up in your business, your work ethic will show up in your business and most importantly, your money habits will show up in your business. Knowing your numbers is a sign that you respect money. Where money is respected, there it will be. The habits in your personal and business life make or break you and applying sound principles that develop good financial habits can lead to wealth generation for both you and your business.
ActionCOACH Thabo Pitse