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Don't Fall Victim to the Triangle of Entrepreneurial Finance

Don't Fall Victim to the Triangle of Entrepreneurial Finance

Your business finances impact your personal finances. Read more to discover how to manage them together.

Peter Sander and J. Jeffery Lambert, Entrepreneur

This article has been excerpted from Ultimate Guide to Personal Finance for Entrepreneurs by Peter Sander with J. Jeffrey Lambert, available from Entrepreneur Press.

Business operations, business finances and personal finances are inexorably linked in the triangle of entrepreneurial finance. Decisions and actions at one point in the triangle will most likely-in at least some way-affect a decision made in another. Some of these influences are obvious; others are more subtle. But like a balance equation in chemistry or physics, there will always be an effect. The question is how large an effect?

For example, the effect of an operational decision to hire employees has an obvious effect on business finances-wages or salaries paid, benefits paid, insurance covered, facilities required. But does this decision affect your personal finances as an entrepreneur? Obviously it might affect the cash flow you take from the business, but hopefully not much, as the ROI of these new employees should be positive. But more subtly, the number and kind of employees you have can affect the choice of retirement plans and employment benefits and, in many cases, open up options and alternatives for your own personal retirement plan. The employees may also help you qualify for group insurance plans or for better plans than you have already. That’s the kind of effect we’re considering.

Let’s take a moment to examine the points of the triangle and how the pieces fit together.

Business Operations

As an entrepreneur you will make hundreds to thousands of operational decisions in setting up an infrastructure and producing your product or service. All decisions that involve money involve the finances of the business, of course, and many, like employment and facility decisions, will affect your personal finances as an owner. And these decisions are never finished: They will adjust and evolve as your business evolves-and so will your business and personal finances. Business operational decisions include the following:

Employment and employees. Whether to have employees, how many, and what kind of compensation to provide are decisions that affect business finances in obvious ways. Decisions about employee benefits and retirement plans will affect you, for whatever you decide to do for them may have consequences for you: You can participate in benefit and retirement plans, often to your advantage. Also, your decision on how to use yourself and your spouse and/or family members as employees can impact your finances.

Facilities and location. Early on, you’ll have to decide what kind of location and building your business needs. That decision will likely have to be modified as the business grows and evolves. Naturally, like employee costs, facility costs are a major factor in the finances of most businesses. But key decisions on building ownership-buy vs. lease, owner buys and leases to business-are important to personal finances. Depending on the business, many entrepreneurs look to buy their facilities to build the asset base as part of a retirement or other exit strategy for the business. In addition, the use of a home or other personal space in a business has important personal finance consequences.