Here in Australia, small businesses are the lifeblood of the economy. At last count, they accounted for 99.8% of all businesses nationwide. That’s both a testament to the entrepreneurial nature of Australians as well as a powerful statement on the diversity of the overall economy. But in times of economic crisis, it can also be a major financial weak spot.
That’s because the average small business lacks the financial wherewithal to withstand a protracted recession-like economy. And already, experts are warning that the Australian economy may be is entering such a phase. It’s a situation that threatens the very existence of many small businesses. But more than that, it directly threatens the livelihoods of countless Australians.
For small business owners, that means now is the time to take steps to shore up their financial practices and start preparing to ride out the storm. To help them do that, here are four personal finance tips to put in practice right now.
Disentangle business and personal finances:
Despite constant advice to the contrary, many small businesses (and especially sole traders) develop a dangerous habit of keeping their business and personal finances intertwined. In good times, that might not create many visible problems. In bad times, it can create a financial disaster. So, the first step in preparing for a lengthy recession is to separate business and personal finances.
This will make it possible to more accurately gauge the business’s financial performance as the recession takes hold. It will also help you understand which personal spending habits you’ll need to change. When the tax year ends, you will save on accountancy fees.
Create a personal emergency fund:
Right now, small businesses that have managed to weather the economic effects of the pandemic are amongst the fortunate. It means they’ve managed to keep money coming in during some of the roughest economic conditions in living memory. But the question remains, what if their luck doesn’t hold up?
To deal with that possibility, small business owners should practise smart financial planning and begin building up a personal emergency fund. A good rule of thumb is to try and keep at least three to six months’ worth of post-tax salary in reserve, in a liquid cash account. That will make it possible to ride out rough patches without having to risk long-term business damage in pursuit of short-term gains.
Categorise personal spending:
Most small business owners know how critical creating accurate budgets are to long-term business success. And despite that, many fail to apply the same logic to their personal expenses. Some create personal budgets but don’t exactly enforce them as rigidly as they should. Others do not attempt one at all.
A good first step for budgeting is to assign priorities to personal expenditures. To do this, take a snapshot of an average month, and figure out what spending is critical, and what isn’t. Assigning a sliding scale value from unavoidable (food and shelter) to luxury (entertainment and fine dining) creates an instant roadmap to inform spending cutbacks should they become necessary.
Plan for a wind-down:
Although no small business owner wants to think of a day when their company is no longer, failing to plan for the possibility leaves them financially vulnerable in a recession. As unpleasant as it may be, now is the time to start thinking about what conditions might force your business to close. Doing this can help you avoid spending your money on a lost cause.
To prepare the right way, it’s necessary to examine both the business’s financial condition as well as the owner’s financial condition. The idea is to create a financial projection that imagines how poor your business returns would have to be for you to state that you were in hardship. Once you’ve done this, sketch out a timeline covering the steps necessary to close your business down. Work backward in the financial projection to find the point where beginning wind-down procedures becomes necessary.
Be ready for what comes:
With the right planning, small business owners are less likely to face personal finance catastrophe if the recession weighs on their business. They should have great visibility into their financial condition and have plans in place to cut spending or wind down operations if need be. With hard work and a little luck, all of this planning will remain theoretical. But if any of it becomes necessary, you’ll be glad to have done it while there was still time to think with a clear head.
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