Five approaches to improve your own balance sheet

 Five approaches to improve your own balance sheet

Having a strong personal balance sheet is important in the dynamic world of entrepreneurship because it gives you the foresight and grounding to take calculated chances and confidently leap into the future. It also ensures your financial security.

The entrepreneurial spirit is marked by risk-taking, creativity, and frequently daring. While these characteristics aid in the development of innovative firms, they also frequently cause business owners to disregard the stability provided by a solid personal balance sheet.

A healthy personal balance sheet should be on every entrepreneur's radar for the following five convincing reasons:

Diversification

Diversification is a term that is not just used in portfolio management. Entrepreneurs frequently invest a sizable percentage of their fortune in their companies. Over half of firm owners, according to a UBS Investor Watch survey, don't have an exit strategy. Without that, their family and personal well-being are vulnerable to the whims of the market. By building a broad personal balance sheet, an entrepreneur can make sure that her financial future is not entirely dependent on the success of her business.

This is the portfolio of one of our business clients. While commercial assets still account for a significant portion, other personal assets are being developed gradually.

Liquidity

Even successful companies occasionally run into liquidity problems. In a revealing analysis, The Financial Times identified cash flow problems as one of the main reasons for company failures. In essence, not having enough money at the proper time means passing up possibilities or, even worse, winding up.

While it is not advised to utilize personal assets to get through challenging company difficulties, business owners frequently provide personal guarantees and put their assets up as collateral when applying for business loans. Mortgage loans have interest rates ranging from 8.15 to 11.80 percent annually (p.a.), whereas personal loans can cost up to 14 percent annually (p.a.).

Entrepreneurs ought to have a financial cushion that gives them some breathing room and prevents them from needing crisis funding.

management of risk

Each and every business owner voluntarily accepts volatility. The business owner's family doesn't, though. A client had a sizable pharmaceutical distribution company that expanded steadily from a small retail pharmacy to a prominent distributor in Tamil Nadu. He was self-made and used the revenues from his company for many years to finance the expansion of his enterprise.

His profits were severely impacted by the rise of online retailers and their bargain marketing techniques. By chance, his daughter was getting married at the same time as his son was leaving for a study abroad program. He could have saved up a portion of the earnings, invested in stocks, mutual funds, or bonds, and utilised this money now rather than later. He hadn't, though.

He took out a lot of debt to pay for the wedding and the children's education. He had trouble paying back the loans, though, and eventually decided to sell his company. He currently works for a fintech business. He could have reaped the pharma jackpot after Covid had he simply produced enough assets during his prime.

Business decisions

According to Jeff Bezos, the secret to long-term success is to think strategically. Amazon's expansion is proof of his long-term thinking and customer-centered approach. The long-term costs of taking on an inappropriate customer far outweigh the immediate profits their business will provide in service sectors like wealth management. However, it is only possible to refuse immediate financial gain when there are sufficient reserves to cover expenses for a few months.

Entrepreneurs frequently make quick, naive decisions as a result of immediate cash concerns. However, a business owner with a strong personal balance sheet has the luxury of distance. She has the financial flexibility to put her attention on long-term strategic growth rather than just short-term rewards.

stakeholders' trust

Stakeholder impressions are subtly influenced by an entrepreneur's own financial situation.

A stable financial foundation allows an entrepreneur the assurance to take calculated risks. Potential investors, lenders, employees, and business partners become more confident as a result.

The following five steps will help you create a solid personal balance sheet:

1. Establish personal wealth goals based on significant life events, family aspirations, etc., such as marriage, home ownership, and so forth.

2. Remuneration engineering: as a business owner, determine the best ways to compensate yourself in a way that is the least tax-inefficient while maintaining business growth. You may perform this delicate balancing act with the aid of a business coach.

3. Create a diverse portfolio by including holdings in bonds, cash, stocks, commodities like gold, and real estate, among other things.

4. Continue making regular investments in your portfolio until you no longer need the business to support a decent living.

5. Make a strategy plan, taking into account business succession and asset distribution.

Many seasoned business leaders would agree that long-term success is frequently determined by one's capacity to strike a balance between the excitement of conducting company and the caution of personal financial management.

Investing superstar Warren Buffett once said, "Risk comes from not knowing what you're doing." Having a strong personal balance sheet is important in the dynamic world of entrepreneurship because it gives you the foresight and grounding to take calculated chances and confidently leap into the future. It also ensures your financial security.