This is a joint blog post with Family Financial adviser Suzy Kahati, who specializes in helping families with fluctuating income (that’s right business owners and freelancers) manage their finances. Suzy can be reached via her Facebook page.
Shira* started a small business two years ago. She sells fashionable clothing and makes a nice profit. However, since her business is still very small, she puts all the revenues right back into the business. Her household has not yet seen a red farthing from all her business dealings. Her family is in the red and Shira feels dis-empowered, because she has nothing to show for all her hard work.
You finally opened your OWN business and you are now your OWN boss. You promptly put your business plan under your arm and walk into your own office. Yet, a year later we see that over 40,000 businesses in Israel will close and most of them new businesses. What is the cause of so many businesses failing either during their first year or within 4 years?
Let us take a look at a small business and compare it with a larger business. In a large business we have people managing the company that specializes in their field, a CEO, CFO, marketing, sales, administration and employees. Yet in a small business one person has to be an expert in all the fields mentioned above. This is a lot for one person to handle. You might be an expert in your field but can you manage all of the aspects of your business?
MONEY is the major reason for the failure of many businesses, especially new ones. You most probably financed your new business with personal capital or took out a loan and you calculated this to be sufficient for the first year. The importance of financing for the first year is that you need resources to invest in promoting the business while usually the business is not yet profitable.
As a Family Financial Adviser, Suzy works with a lot of families with fluctuating incomes. The common scenario that she encounters with families that have set up a business is that they have calculated the cost of the business but they did not take fully into account that the household needs your income as well, which is your salary.
When a person starts her business, she has usually leaves a place of employment. For example, she received an average salary of NIS 9,000, maybe had a car and other benefits. Her spouse also earns the same salary and therefore there is a joint income of NIS 18,000. All of sudden there is one salary not being paid at the first of the month. If the household has not made any revisions to their expenses, the family bank account very quickly goes into the red. By the end of the year I see a family in serious debt.
Furthermore, while the entrepreneur may be wrapped up in her dream of a successful business, the spouse may not always share the dream. He may not be willing to pay the financial price of long-term business development at the expense of the family’s immediate prosperity. There might be other issues, such as children (and spouses) resenting the lifestyle changes. In due time, the financial pressures create marital discord and the entrepreneur finds herself fighting on all fronts.
When a family puts pressure on the business it cannot function well. The entrepreneur has enough challenges to be successful, and family financial pressure is one that can be avoided with careful planning and budgeting. Before you set out to open a business, take your family’s financial situation into account. Can you survive on one income? How fast will you make your first shekel? Can your family change its lifestyle for the time it will take to generate some cash from the business?
Managing Family Finances
Investment - don’t jeopardize your entire life’s savings by investing them in the business. Ask yourself how much you can afford to lose without undermining your family’s financial stability in the long run. Consider alternative sources of funding. Venture capitalist Shlomo Kalish advises businesses against investing their own capital. He maintains that entrepreneurs take enough of a risk investing all their time and endangering their paycheck. Adding savings to the equation makes the situation even riskier.
Bootstrap - Most entrepreneurs get sidetracked by “new shiny objects,” such as branding, graphic design, and the latest web capabilities. Ask yourself what are the most essential components for your ability to start this business and develop it in the next six month. Do you need the most comprehensive package of this new program? Can you make do with the slimmer and less expensive option at least for now? You can always upgrade and buy more features and products later. Don’t waste all your money right away.
Pay yourself first – Make sure that your business plan includes an income for the household, however small. If you are making some money, don’t automatically pour it back into the business. Cut yourself a paycheck first. It will make you and your family feel like there is what to show for all the hard work.
Household budget - Draw up a household budget and define your expenses: what has to be paid and which expenses are non-essential. The home needs to go on a financial diet until the business becomes profitable. Take your family’s comfort level into account. Will you and your spouse be able to stick to the budget when the kids clamor that they “simply must” have the latest gadget?
What tricks have helped you keep your family finances afloat as you built your business?