A business is often registered and largely seen as a separate legal entity from the owner; however, this divorce does not really take effect between these two lovers as both can’t just resist the temptation of mingling together. This is a major reason why most SMEs fail.
Business owners most of the time tend to muddle up the operations of their business with their personal life; and where there is no line drawn between the two, the business will be unable to review her growth independently.
Even if you use a home-office, you should be able to demarcate between your home and business expenses. Concentrate on using just an area of the house and keep all home affairs out of this area. This is what the divorce is about. It is that bad!!!
When you start out in business, as an entrepreneur, it is normal that you have to perform multiple roles. At the same time you need to be the management, director and shareholder. This multi-role, maybe even multi-personality, can become ingrained in a way of working which leads to problems when the company expands and involves others in the operation of the business.
Drawing the line between your personality and your business
Even though it is a hard discipline, every entrepreneur must put machinery in place to make this divorce come to effect. So, my advice if you really want the break up to be permanent;
- Maintain separate accounts for your business (in the business’ name, not yours) and personal transactions
- Employ a knowledgeable and skilled accountant
- Have a small business version accounting software
- Keep sound accounting records
- Periodically get help from a professional financial advisor
- Discipline yourself not to borrow from the business. Avoid borrowing from the business as much as possible. It is easier saying: “I’ll pay back when I have the money” than doing it. Better to take a loan from the business (there must be a standard loan application procedure in place) and pay back using the established system.
- Pay yourself a marketable salary. It is very important for the business owner to pay herself a marketable salary. Don’t pay yourself so high above the salary level just because your business is doing well: save for the rainy days. Paying below the market level is not also recommended. This can negatively impact your family life and sustaining may become a problem. In short, what will you pay somebody who replaces you? Pay yourself that amount.
Why you need a solid financial system
One of the most important steps that will aid you in measuring the growth of your business is setting up a solid finance system. One that is not only fashioned for your business model but that helps ‘think tax ahead’ and measure growth effectively. Setting up that system does not require ‘money’, proper advisory is only needed.
Accounting systems have been set up using Excel and as the business grows, it moves to simple ERPs. A finance system review is a necessity for businesses already running who can’t evaluate their businesses effectively, or are in various tax mess.
The role of audit in a business cannot be over-emphasized. If the business was set up for profit making, then the tax authority will want to have its share. Thus, having good and accurate records saves you from digging through scattered records of receipts of personal and business expenses when it is time for tax audit. This will also help avoid “tax headaches.”
Maintain supporting documents to serve as proof of separation as this is essential if you want to stay on the “right side of the law.” It may be difficult making this separation at the beginning but as time goes by, with determination and dedication, it will get easier and more efficient.
Editor’s note: This article first appeared on She Leads Africa. Read the original article