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Money mistakes that every entrepreneur should avoid

One of the biggest mistakes that entrepreneurs make is to invest all their personal wealth back into their business - making it their sole investment.

As an entrepreneur, you ought to believe in your business with a high level of conviction. That’s the mark of a successful business owner. However, that doesn’t mean one has to sink every single rupee that one earns into one’s business.

One of the biggest mistakes that entrepreneurs make is to invest all their personal wealth back into their business - making it their sole investment. That’s not at all a smart move, and a risky proposition too.

Watch out for personal liability

If the economy grows sluggishly, your business prospects could also be affected. In such cases, it is possible that your family’s lifestyle may get compromised, as family finances are tied to that of the business. Moreover, challenges in cash flows and the addition of business debt could jeopardize personal property and investments.

While you should build your company as if it will last forever, invest in your personal wealth as if everything will collapse tomorrow.

In fact, if your business is registered as a sole proprietor, legal liability is unlimited. In case of lawsuits, your personal assets – house, personal belongings and investments - could be seized to pay off the creditors. However, if your business is registered as a limited entity or a corporation, only business assets are exposed to such financial obligations.

It is therefore essential to, first of all, segregate business and personal wealth. Start with registering properties and assets that are part of your business in its name and personal belongings including that of real estate and other investments in your name. Maintain a separate bank account and accounting records for the company and private transactions. Choose a legal structure for your business - away from that of a sole proprietorship.

Build a non-business kitty

While you should build your company as if it will last forever, invest in your personal wealth as if everything will collapse tomorrow. Ideally, the non-business kitty should take you closer to your critical financial goals like retirement. Therefore, systematically start allocating a significant portion of money which you earn by way of business into various assets classes – equity, debt and cash. A robust asset allocation plan along with an effective investment strategy over the long-term should take you closer to your financial goals.

Business transparency with a spouse

Entrepreneurial life often involves spending long hours at work and going through periods of high risk and uncertainty. Despite your good intentions, personal life usually takes a backseat thanks to the creeping intervention of technology into homes. And if the entrepreneurial venture collapses, it often takes the family finance’s down along with it, risking marriages and relationships.

In the book “For Better or For Work: A Survival Guide for Entrepreneurs and Their Families”, author Meg Hirshberg encourages entrepreneurs and their families to strive for and focus on the ‘magic moments’ when owning a company. It makes possible a family’s most remarkable experiences, she says. So, if your business has hit a key milestone in revenues or customer count, invite families of your entire team and celebrate. While not the nitty-gritty, at least let your families know the overall direction of the business.

In short, separate your personal assets from business liabilities. Build a robust non-business kitty to meet your financial goals like retirement. Last but not least, take your spouse, who has played an integral role in your success, into confidence. Keep them apprised of the key developments in your business.

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