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5 things to consider before dipping into your personal savings

A business owner who borrowed from her personal finances on what she learnt, and an accountant on what to consider when deciding whether to dip into savings.

Personal Savings

We spoke to one small business owner who borrowed from ‘the bank of me’ about what she learnt from the experience, and to an accountant about what he advises small business owners to consider before making this decision.

At a glance

Here’s a snapshot of the advice from our interviewees:

  • Keep your personal and business finances separate from the start. Too late? Untangle them ASAP.
  • Don’t make any funding decisions alone – seeking expert advice is essential.
  • Gut feeling is good. Gut feeling supported by facts and figures is better.

How Kasia McNaught used personal savings

“I always had a long-term strategy for growth,” says Kasia McNaught, founder of boutique digital marketing and communications consulting agency McNaught Media. But that strategy hadn’t accounted for a pandemic.

“Everything was so uncertain and many of my clients had to put their campaigns on hold indefinitely,” Kasia says.

Her work included a lot of face-to-face consulting and government tenders. She didn’t know if that would continue, or how long the business interruption would last, but was focused on keeping her business going.

“I didn’t want to give up on it or go and work for someone else after all the years of work I’d put in,” Kasia says. But cash flow was an issue, with reduced revenue and an unpredictable outlook – her business needed a cash injection.

“I decided to consider putting personal money into the business to support it through the pandemic,” she says.

Kasia sought expert advice, forecasted and weighed the risks.

“Getting good financial advice before taking the leap was critical. We looked at what the growth had been and made a very conservative assessment of what we expected it to be over the next 12 months given everything that was going on.”

She then settled on a lump sum that she would contribute to the business and set up a gradual repayment plan.

“Growth has been steady, especially over the past six months. It was a nerve-racking decision in some ways but also a relief that I could stop worrying about my business and concentrate on getting my clients back on track.”

This time tomorrow you could have the funds you need to fuel growth and opportunity. Find out more.

5 considerations before using personal savings

As Greg Mawer, Director at Accumulate, points out, COVID isn’t the only unexpected challenge to upend small businesses. It’s notable in its scale, indeed, but illness, the loss of a big client or natural disaster can all play that role for individual businesses.

“Many small business owners saw their margins dropping and had to make the decision – put more money into the business and hang on, or sell or close the business.”

Funding, whether it’s to get through a tough time or to boost working capital, can support controlled growth or stabilise the business after a downturn – and that includes funding from business owners themselves.

Here, Greg shares his advice for small business owners considering reaching into their own pockets to support their businesses through challenging times.

1. Weigh risk and return, with expert input

“Small business owners are very good at what they do but are rarely financial experts, so getting good advice is essential. Have a chat to your accountant and they can explain in layman terms the risk of undertaking certain transactions,” says Greg.

He recommends taking a hard look at return on investment – which requires separating ‘yourself the business owner’ from ‘yourself the investor’, and assessing the impact of the investor’s spending.

“If you keep putting more money in but your profits remain the same, then your return on investment is getting lower. Ask yourself if putting the money into your business will achieve a greater rate of return than if you held it in your personal bank account,” Greg suggests.

“And from a risk perspective, be aware that the more of your own money you put in, the more personally challenging it will be if the business collapses.”

For example, Greg explains, if you’ve borrowed against your house, your personal assets are at risk if the business fails.

“Your accountant can also perform a sensitivity analysis which can show, for example, that if sales fell by, say, 10%, then the business wouldn’t be viable and you wouldn’t be able to pay back the loan.”

2. Keep your business and personal finances separate

Greg has seen people lose track of what payments are for the business and what payments are personal.

“If, for example, you use the same electricity provider for your business and home, then it’s very easy to lose track of which is which and you can end up not claiming either, or claiming a deduction you’re not entitled to,” he says.

Kasia was in the cohort of business owners who, in the early days, didn’t separate their business and personal finances.

“Once I’d got my accounting software in order, and had separate accounts and cards, it was so much easier. Now it’s just seamless and makes all the bookkeeping and reconciliation much more straightforward,” she says.

And the complications that can arise from tangled finances could go beyond tax deductions, particularly if your business is dipping into personal finances – it may become difficult to ascertain profitability.

“Keep your debit and credit cards separate, and set up your accounting software so that your personal loans to the business are treated as a contribution in your accounts,” suggests Greg.

“Creating separate accounts in your chart of accounts, such as owners’ drawings, owners’ contributions and profit share, allows you to keep on top of how much you’re putting in, how much you’re taking out and what the profits are.”

3. If you’re concerned about solvency, act quickly

While your accountant can do a basic solvency analysis, working with an insolvency practitioner doesn’t necessarily mean the business is beyond saving. Rather, says Greg, think of it as taking mitigating action.

“An insolvency practitioner can help you find ways to restructure so your business can continue. For example, you might set up a deed of company arrangement and quarantine your debts,” he says, adding that when you have all the information, you can make a more informed decision about contributing money from your personal funds.

“And you should do it sooner rather than later. If you continue to trade when insolvent then any new debt you incur can fall through the corporate veil and leave you personally liable.”

4. Be optimistic – for the right reasons

“In my experience, small business owners tend to be optimistic, which can be a great quality. But sometimes, you just need someone to tell you you’re throwing good money after bad,” says Greg.

“Be honest with yourself. If you’re going to work on gut feel, you have to have the data and the numbers to back it up.”

Kasia’s tip captures both the optimism of small business owners and her focus on the data.

“Make sure you get good financial advice,” she says. “The numbers don’t lie.”

5. Plan and forecast

“Do a cash flow forecast, build up the business balance and always leave yourself a couple of months’ worth of expenses as a buffer. You never know when something unexpected or out of your control might happen,” says Greg.

With Prospa’s fast application and decision, this time tomorrow you could have the funds you need to fuel growth and opportunity. Find out more.

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