We’ve talked a lot about personal cash flow and finding balance in recent Illumination Wealth Blog posts, but what about personal cash flow for business owners?
How important is it?
How should you manage it?
Obviously, business cash flow is vital to keep a business running. You have to pay expenses and have cash available for payroll, vendors and other liquid needs. However, a lot of business owners—especially small business owners—tend to neglect the management of their own personal cash flow. Some financial experts might argue that the money flowing through your personal accounts is just as important (if not more) than what is passing through your business accounts.
On paper, personal cash flow is a simple concept. It is the amount of money you put into your primary account every month minus the amount of money you use to pay for bills and other regular expenses (food, gas, entertainment, etc.). Obviously, the goal is clear. You want to have more money going in each month than you have going out.
Yet, managing personal cash flow is rarely as simple as that in practice. Some monthly expenses may vary and there are other factors involved. Also, there is such a thing as too much cash flow, which means you have extra money that could be used in other places for better purposes. Ideally, you always want to have a little surplus in your personal accounts to handle the variances in spending you might have every month. It’s like filling up your gas tank when you are down to a half or quarter of a tank rather than waiting until it’s on empty. This surplus helps avoid situations where you are cash poor and scrambling to pay your bills or cover emergency expenses.
Though a little bit of surplus is good in your personal accounts, too much is actually bad. That extra income is taxable and could even put you in a higher tax bracket over the course of the year. At the same time, that excess cash could be used elsewhere. You could put it in to investments (including investing back in your own business). You could apply toward paying down the principal on your home or other properties you own via mortgage loans. Or, you could put it toward your retirement plan, which will present pre-tax savings and also help you build up your IRA/401(k) funds.
This strategy is good for anyone when it comes to managing personal cash flow. Make sure your expenses are covered and leave a little surplus, but use any truly excess income for better financial purposes such as investments or increased IRA contributions. To do this effectively, you do need to carefully track your spending against your income to find the right balance for your personal cash flow.
From a business owner’s perspective, it’s easy to see the argument why personal cash flow might be more important than business cash flow in the long run. Both need to be managed properly. However, the point is you want to pay extra attention to your personal cash flow. It’s tempting to want to take home as much of your profits as possible as a business owner. All you may be doing, though, is increasing your taxable income and that’s not a good thing when those excess earnings could help your financial situation in other ways.
A good financial advisor will be able to help you navigate both your business and personal cash flow needs while putting together investment strategies and retirement savings plans that will maximize your money for the future. Managing cash flow is just one of many key components to achieving financial independence and reaching an early retirement.
For all your personal and business financial advisement needs, contact Illumination Wealth today for an introductory consultation with one of our experienced financial advisors.