Why is it important?
Business owners are a breed of people who are great at managing money, or at least they are believed to be. Sadly this is only a myth.
The managing of assets, liabilities, revenue and debt for the business comes under Corporate Finance whereas personal finance involves all the decisions of an individual or household related to their personal assets and liabilities. Most business owners are unable to draw a clear distinction between the two due to their emotional incapabilities and not understanding the huge risk of not doing so. It should be the prime concern of a business owner to make sure that If one incurs losses in the business, they must not lose their wealth in it. This wealth can be used in such a way that it also creates passive income for a business owner on the side. The business may be an integral part of their life, but what needs to be understood is that the point of doing business is to earn and give your family a secured life and that is more important than the business. If you’re not able to make sure that your family will be fine in all situations or your personal expenses are taken care of, is independent of your current business status, what is the point of doing the business.
Why do people not do it?
Now the question might come up that if it is so important to segregate the two finances, why do people still not do it? The reason could be many and it is not something that only small business owners ignore. There are large and medium-sized business owners having net worth well over Hundred crores and they too never considered working on their personal wealth and keep giving their everything to their business. It could be their ignorance or their lack of time or understanding or they are simply lagging in the implementation part. Smart business owners have only been able to grow their business when they do not have money distractions and one way to do that is by creating this distinction so that you know that the adverse conditions in your business are not going to affect your living standards or your family’s plans. Business can be scaled by taking leverage in form of a loan from an individual, bank or even ourselves when we are free of our personal money worries whereas it will be a lot riskier if we do not have any such distinction in our finances.
What should be done?
We should first of all not invest everything that we own in our business and try to pool capital from outside as well. We have observed that business is something that keeps asking us for money irrespective of how business is doing, we always feel the need to put in more capital to improve or expand. Now, what needs to be understood is that when the business is doing fairly well, there is no harm in changing the ratio of capital sources, i.e. taking out drawings and going for debt source. This drawing money could now be put into your personal wealth pool and be used to earn Passive income along with an active income from the growth of existing Wealth. This way both the finances can be balanced and productive.