One piece of advice given to new business owners: keep personal and business finances separate…
And for some business structures, it’s not just good advice, but a legal requirement. Businesses that ignore it risk personal exposure to creditors and potential piercing of the corporate veil.
But regardless of your business’s legal structure, maintaining separate bank accounts and records for personal and business finances is good practice.
But keeping the money separate doesn’t mean your personal finances and practice finances are unrelated.
Frequently, they are closely connected, and household expenses, personal debt, and other financial obligations influence decisions you make in your practice more than you may realize.
That’s why it’s important to understand both sides of your financial life.
Keep it Separate, but Understand the Connection
From an accounting, practice management, and legal perspective, your personal and business finances should be kept separate.
But of course, you stand in between, aware of and affected by both.
Your practice must support itself, build reserves, and eventually provide you with income.
At the same time, your personal financial needs may influence how much money you must have from the practice.
For example:
- If your household expenses increase, you may feel pressure to take more money from the practice than is prudent.
- If you have little personal savings, a slow month in the practice may cause you anxiety and produce fear.
- If you are carrying significant debt, you may feel it’s urgent to increase your revenue.
None of these correlations are unusual, but they are important to recognize.
Personal Financial Pressure Affects Business Decisions
The problem isn’t debt or high expenses; it’s the level of pressure and financial stress they create.
For example, if you have large monthly household expenses, student loans, and credit card payments, it’s likely to influence any number of business decisions:
- The amount of money you take out of the business.
- How quickly you can grow the practice.
- If you can afford to hire staff.
- If you can qualify to lease or purchase more equipment.
- If you can afford to add new services.
- Whether you qualify to take on additional debt.
Sometimes the impact is not obvious. You may think you’re making a strict business decision when the real reason is your personal financial situation.
That doesn’t make the decision wrong, but you should know the real reasons behind it.
Ideally, business decisions should be based on what the practice can support and what makes strategic sense, and not on the owner’s current financial needs.
Household Expenses Matter
Everyone has personal living expenses that range from low to average to high.
Housing, food, insurance, transportation, childcare, healthcare, debt payments, and other expenses continue whether the practice has a busy month or a slow one.
As a result, two practice owners with similar practices may face very different financial pressure.
One owner may need $4,000 a month to cover personal expenses. Another may need $8,000.
Neither number is good or bad, but the difference matters.
That’s why a practice cannot be evaluated only by asking:
“Is the business profitable?”
A better question to ask is whether the practice can support the financial needs of its owner.
That means understanding what you personally need from the business and whether the business you are building can realistically support that over time.
Savings Give You Breathing Room
Starting a practice with personal savings gives the new owner something extremely valuable… time!
With a financial cushion on your side, you may be able to:
- Leave more money in the practice during a slow period.
- Wait longer before increasing your own pay.
- Give the new marketing strategy adequate time to work.
- Stop making rushed decisions because you need more money now.
While savings alone don’t eliminate uncertainty, they can reduce the pressure and stress around financial decisions.
An owner with little or no personal savings may have fewer choices, and even just a temporary drop in revenue can quickly become a household emergency.
And once that happens, every business decision comes with more pressure and urgency.
Personal Finances Can Influence Fees, Hiring, and Growth
The connection between personal and practice finances shows up in some of the most important decisions you, as the owner, will make.
- Fee Structure: With enough financial pressure, you may raise your fees simply because you need more income, or keep them too low out of fear of losing patients.
- Owner Pay: How much should you pay yourself? The question to ask is: “How much can the practice responsibly afford?”, not just, “How much do I need?”
- Hiring: Employees help grow your practice, but they also cost money. Payroll reduces the amount available to the owner, and it may be the reason some delay hiring, even when employees could help improve and grow the practice.
- Growth: Most practice owners want to grow their business. However, if there is too much financial pressure, the practice may grow too fast… adding services, staff, space, or debt before it’s ready.
Is It a Business or Personal Problem?
This may be one of the most useful questions to ask yourself…
Suppose you are thinking: “The practice is not paying me enough.”
This could mean the business needs more revenue, better margins, or lower expenses; but it could also mean your personal expenses have gone up and you need more revenue to pay your bills.
Alternatively, you may be thinking: “I need to grow the practice.”
The decision to grow the practice may be the right move… However, it could also stem from higher personal financial obligations rather than a strategic need within the practice.
So before changing anything in the practice, ask yourself this:
Is this a business issue, or am I asking the business to solve a personal financial problem? The answer to this question will give you much-needed clarity.
It’s About Choices
You don’t need to be rich or debt-free to make good business decisions.
However, it helps to know your personal financial situation: what you owe, what you spend, what you have saved, what you need from the business, and what the practice can realistically provide.
Knowing these numbers makes it easier to recognize when personal financial pressure is influencing business decisions.
Keeping personal and business money separate is essential, even if they are connected.
The money-smart practice owner keeps personal and business finances separate and has a good grasp on both.
Do you agree with the correlation between personal and business finances?
Let us know, leave your comment below…
By Johanna Hofmann, MBA, MAc., regular contributor to the NPBusiness blog.