Money Management Tips for Small Business Owners
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“When you’re a small business owner, you feel like all the business gets is your money. It is a dangerous thought.
That was the first line Salve Duplito said to me when I asked him how entrepreneurs are supposed to manage their money, and it stunned me. Isn’t the money your business makes… yours?
Technically, yes, but it shouldn’t be.
Salve Duplito is a financial journalist and Registered Financial Planner®, best known for hosting the ABS-CBN News Channel show called On The Money, where she gave personal financial advice to her watchers. She also has her own independent financial advisory firm called Empower and Transform with the aim of making financial services more accessible and affordable.
During our conversation, she clarified that many entrepreneurs, especially start-ups, tend to treat their profits as extensions of their portfolio.
“It’s dangerous because when you fail you cannibalize your business to the point that it won’t have the resources to survive, especially during turbulent times like the pandemic. Eh turbulent na nga during the good times, lalo na during the pandemic.”
It’s a mix, and it’s the first tip she shared as we map out the key tips every small business owner should learn.
Here are other nuggets of knowledge from Salve Duplito that every small business owner should know:
The 20-20-60 approach
Mixing, as Duplito explains, is when you treat every gain from your business as your own money. She says it shouldn’t be because when the business goes down, you go down, and vice versa.
His advice? Give yourself a salary. If you have a fixed salary, you stop relying too much on every sale you make.
Your salary will be used for your personal needs such as groceries, medicine and clothing. It also gives you the option of having personal investments as well as an emergency fund which we will explain in more detail later.
There are many approaches to creating your own salary, but one suggestion from Duplito follows the 20-20-60 approach. This involves dividing the net income of your business into three slices. The first 20% is for the owner’s salary (or dividends since dividends are less taxed compared to a salary). The remaining 20% is an additional bonus for employees so they have more incentive to stay and work hard.
“So the 60%, what do you do with it? You make it grow by reinvesting it [back] in the company, in new products or in another company. To make the power of compounding work for you. If you do that, you’re not mixing your money with the company’s money.
Everyone needs a safety blanket to fall on, the pandemic has taught us that. In the past, most advisors recommended having three to six, sometimes nine months worth of expenses for your personal emergency fund. That’s how you don’t worry in the short term if you lose your job or business. Duplito says that ideally you would want to extend this so that it lasts at least a year.
She also thinks the same idea could apply to businesses. Duplito shared that in one of his interviews with billionaires, one of them told him that they asked their team how long they could survive on zero income.
“Three years daw. Magpapa-sweldo sila and all, without income they will survive. Ganun din, for small businesses, this is what you need to do. Now you’re wondering how long can you survive on zero income, and if you mix your finances with the business, you won’t be able to survive on zero income,” she said.
Having so much money set aside for emergencies is a noble and expensive idea, but Duplito swears by it. She also says the same thing about insurance.
“Karamihan ng negosyante, ayaw ng life insurancealways medical insurance because they think it’s a waste of money. They like to make money, they like to invest money. Even if it is just wooden slabs, business owners prefer to invest in wooden slabs which they can sell for a little more after a few months than buying life or medical insurance. Yanang thinking ng traditional filipino na negosyante, but COVID has changed that.
His advice is to get the cheapest with the highest coverage you can afford. Just be sure to read the fine print carefully so you know what you’re getting into.
Loans and lines of credit
The hard truth about business financing is that startups and small businesses face intense scrutiny when applying for a loan, not to mention the need to produce substantial collateral just to speak to a banker.
This is a hurdle that leads many business owners to rely on personal loans or credit cards, which Duplito respects but does not encourage. “If a company has unsustainable debt, the company is in trouble, but the responsibility ends there. There’s more latitude if it’s a business borrowing money because the bank can’t take the owner’s personal property. So yung sarili mong bahay hindi kukunin. Pag as the person you gon’ borrow, the bank can get your house back.”
Another advice given by Duplito is to check the actual interest rates of the loans, as they are usually different from the initial quotes or what is announced publicly.
Work with financial advisors
If you are looking for financial advice, the Internet is a good place to start. But if you want real advice based on your own situation, working with someone who has the right set of knowledge and experience can get you where you need to be financially.
Duplito divides the types of financial advisors into different levels. Its gold standard are those who are paid and independent, and do not earn commissions on companies or products. There are many independent financial advisors you can get in touch with, including those from Duplito’s Empower and Transform, called Transformaric Coaches.
Banks also have trust departments where you can acquire the services of a financial adviser. There are also accountants with a background in financial planning. Then its fourth level would be insurance agents that you can trust to give you the right service without forcing you to buy a product you don’t need.
If you want to learn more about money management, you can get your feet wet by checking out Salve Duplito’s tutorials and interviews on his YouTube channel, or by checking out his Facebook page. – Rappler.com