3 things to consider before dipping into your personal savings

If you’re a small business owner or sole trader just starting out, it can be tempting to rely on personal savings to kickstart operations. Even if you’ve been in the game for a while, using savings becomes an attractive proposition to make a large purchase or when cash flow becomes a cash trickle.

According to an RFi New Zealand SME Banking Council survey, one in two sole traders uses personal savings to manage their cash flow. On top of that, almost one in three hasn’t adopted any measures at all to manage their finances.

When Craig Gardiner, CEO of Small Business Accounting, reflects on the economic impact for small businesses today, it’s clear that these are challenging times for some.

“There are no certainties,” he says. “There are, however, new opportunities in this changed business landscape, and those who have visions of exploring and developing these new opportunities – and are also willing to take a risk – will need capital to get their business ideas off the ground.”

The good news for sole traders? They’re relatively conscious of the importance of cash flow management and financial planning. Two in three sole traders check their cash flow on a weekly basis – rather than fortnightly, monthly or not at all – compared to an average of 58% of small and medium business owners.

But there’s always room to improve – so here’s Craig’s top tips.

1. Assess risk

Sole traders should always weigh up the risk versus projected return of using their hard-earned savings to cover a business shortfall, says Craig.

“You need to do a risk assessment,” says Craig. “Measure up the rewards and returns from the input of your savings. Ensure that as many factors as possible are considered and play out scenarios. Conduct ‘what-if?’ assessments with varying outcomes, as there is a significant element of unpredictability with new ventures.”

It might even be worth pitching in alongside a business partner.

“Where possible, try to share some risk, perhaps with a business partner in a similar situation,” he suggests. “Ask around to see if people would be interested in your product or service, and identify and develop your point of difference to make your offering stand out.”

2. Consider all options and plan ahead

Craig has some very forthright advice on the topic of planning.

“The old cliche is true,” he says. “If you fail to plan you plan to fail, so consider as many planning strategies as possible and think in terms of scale. You don’t plant a tree, you plant a seed – so plan according to the growth cycle of the business.”

In other words, you should look at the long-term plan for your business to decide whether to rely on personal finances at such an early stage, or indeed at all.

For example, consider if drawing down on a line or credit could work better for your situation rather than drawing on personal savings.

Craig shares similar advice for more established businesses considering an injection of cash to cover a purchase or new venture.

“Look at all your options before adding more equity. What does your business plan say? What does your budget say? If you need to put more money in, will it be as a loan? If so, work on your cash flow forecast so you know when you are going to get it back.”

3. Keep your accounts separate

Craig’s advice on whether to keep your personal and business activity separate, or to consolidate in the single account, is unambiguous.

“Have separate bank accounts,” he says. “It pays to set up a bank account and call it your tax account, and then a separate account for the business.

“Put one of every three dollars you make from sales into the tax account – and don’t touch it.”

So, whether your business is in the first years of operation or it’s more mature, before joining the one in two sole traders who funds goals through personal finances, consider Craig’s tips:

• Assess risks and whether potential rewards are worthwhile.
• Consider a business partner to share the burden.
• Plan repayments alongside your cash flow forecast.
• Keep business and personal finances separate from day one – or get stuck into untangling them.

This article was originally published in May 2022 and has updated for relevancy.