Most professional entrepreneurs begin by running their business the way they run their personal finances. They are used to getting a paycheck. They are used to getting bills. So, the plan is to just put checks in the bank and pay the bills. How difficult can it be?
That is why so many businesses fail. There is a huge difference between running a business and running your personal finances as an employee.
You basically have two sets of expenses. You must still cover your personal expenses and you must cover the business expenses as well.
Most people don’t have a budget for their personal life. Although they know their monthly mortgage or rent payment, they have no idea how much they spend on food, clothing, entertainment, etc.
The first thing is to develop a personal budget.
This is really pretty cool. Unlike the employee who knows how much the paycheck is every month and must stay below that or go in debt, the entrepreneur gets to set the lifestyle and create the income to meet it.
Everything in business boils down to:
- Determine where you are.
- Decide where you want to be.
- Develop a plan for getting there.
- Track your progress.
So, the first step in your personal budget is to determine where you are.
If you know, great. If you don’t know, pay everything by check or with the same debit or credit card for a couple of months and categorize your expenses – food, clothing, entertainment, transportation, rent or mortgage, loan payments, etc.
You are developing your personal cash flow analysis (something we cover in Business Basics). Once you know your actual expenses for the month, an employee would be encouraged to look for ways to reduce expenses. The employee must generate investment income by keeping expenses below income.
However, the entrepreneur can do some dreaming.
What would you like your expenses to be? If you are renting, what house would you like to buy? If you would like a new car, what would the monthly rent or lease payment be? If you want new clothes, how much would you like to spend per month?
What is your monthly wish-list income?
Don’t go out and put everything on a credit card with the dream of being able to make the payments. Think of yourself as an employee of your business. You are negotiating your salary with your business. You are looking at what you want to be earning. You won’t buy the things on your wish-list until you have the income.
I recommend you start small. If your income exceeds your monthly expenses, develop a savings plan to save six months of expenses. Then begin paying down debt.
I loved this story. An older developer hired a construction company to build three condo buildings. The developer was upset with the contractor and was refusing to pay him. The contractor said, “If you don’t pay me, I’ll put a lien on your property and you won’t be able to get the next draw on your loan.” The developer said, “Screw you. I don’t have a loan. I’m just writing checks!”
There is power in being debt free.
We cover depreciation and appreciation in Business Basics. I am currently leasing a car. I think it makes sense for me. I’m paying for the depreciation. In three years, I’ll get a new car.
That is a change in my thinking. For many years, I viewed cars as simply an expense. I bought cars at auction for cash and never had a payment. I did save money. However, I didn’t save a lot of money. I decided to change my thinking.
The main points to get out of this article:
- Determine where you are financially.
- Decide where you want to be.
When you know how much personal income you want, use it to determine what you need to do in your business to generate the income. Use the article, How You Can Achieve Your Income Goal to develop your plan.
Keep in mind that the article covers before tax income. Remember to take income taxes into account.