Unless you decide to join an economics class in college, you won’t get taught all that much about finance – let alone the nitty gritty of how to handle it – in your lifetime. For many countries, money is a taboo subject (more so if it’s abundant such as in places like Switzerland)
For Westerners, money is either a simple concept if you’ve been brought up with it or is just plain confusing if you haven’t.
Meme by The Daily Dot
But if you’re curious about starting up a business or getting to grips with your personal finances – despite your location, class or level of education – we’ve crafted this blog post to show you some key differences between how to treat your monthly pay packet versus your revenue stream.
1. Business Finance Doesn’t Belong to You
Here’s a lesson you’ll need to learn before you open a business bank account or register as a business owner.
The key thing to understand is that business finance doesn’t belong to you – it belongs to the business itself.
Why Does the Business Own Its Own Finance?
In the eyes of the law, a business is a legal person, its own entity and is formed, managed and part-owned by individuals. What does this mean when it comes to money? Well, the cash that’s sitting in your business bank account does not yet belong to you, and only a portion of this cash will ever reach your personal bank account.
For example, if your business earns one million dollars in its first year of trading (which is highly unlikely in itself), you won’t actually be a millionaire twelve months down the line.
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What Money Am I Entitled to as a Business Owner?
As a director of a business, you will essentially employ yourself and use payroll to pay yourself a monthly wage. You may also own shares in the business – if your firm adopts the private company limited by shares legal structure – and take a dividend from the business profits at the end of the financial year.
In short, when it comes to business finance – mitts off. If you’re intrigued by being a business owner purely to make and take a profit, you might be better off registering as a self-employed individual who has easy access to 100 percent of their income.
2. Disposable Income Only Exists in Personal Finance
Disposable income or “spare cash” is a term we often use to describe the money we have left over to play with from our personal bank account after we’ve paid all of our essential bills.
For this reason, disposable income is often linked to total household income where each household member’s income is tallied up to give one disposable figure.
How Can I Work out My Disposable Income?
To work out your disposable income, you would use your monthly salary as a starting point and minus fixed cost bills such as rental fees, ongoing subscriptions, and government taxation.
You can then make an estimate of essential items of which the price fluctuates – like food and other household items – to generate a leftover sum which becomes your disposable income. Those with no money left over after all essential bills have been paid are said to be living on the breadline. In business terms, we would call this situation reaching your breakeven point – where all costs are accounted for, yet no profit is made.
In both personal and business scenarios, this situation isn’t desirable. From a personal perspective, you won’t have any “cultural capital” to enable you to engage in activities and interests “just for fun.” In a business sense, you won’t be showing any signs of operational efficiency or generating any profit.
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Why Does This Not Apply in Business?
The reason why disposable income doesn’t exist in a business sense is that the leftover money is not there to be spent on leisure activities or luxuries.
This leftover money is known as working capital (and this money is leftover in the bank, rather than being seen as funding for a new outfit). A company’s working capital is a signal of its short-term financial health and its level of opportunity for future investment.
3. You Can Beg, Borrow but Not Steal in Business Finance
While you will get reprimanded for stealing in a personal sense – getting caught out in unsavory business activities is far worse (and more common).
As business accounts are made public each year (more on this in section five of this article), it’s not a good idea to be deceptive when dealing with a company’s money.
What Do You Mean You Can Beg for Business Finance?
Begging for business finance should be replaced with bidding for business finance (but let’s face it, that would make the title of this section a lot less punchy!)
There are plenty of government grants, private funding and angel investors who may show an interest in funding your venture if you present your case correctly.
Do you deserve an Arts Council grant to put on a creative project for the public? Should an investor take a chance on you and feature your firm in their portfolio?
While straight-up begging won’t do the job, building a good argument for an investment (that you don’t have to pay back) works.
The Best Ways to Borrow Business Finance
When it comes to borrowing business finance (that is, money you do have to pay back and often with a hefty interest rate), it’s crucial that you look the part.
Meme by Memecrunch
If you’re going to approach a bank, an independent investor or even a trusted family member who might lend you money, you must make sure that you have an idea for how the funds will be used. Turn up with a business plan, a good attitude, and clear reasoning to even be considered for borrowed business funding.
To be taken seriously by high-brow banks you should display all the elements of a well-formed business including a high-status personal image, a business number (either virtual or otherwise) and believable branding that shows you are the real deal.
4. Personal Finance Differs Depending on Class
If you’re finding that you’re constantly broke, miraculously without money or stumped by how rich people got so…rich, you need to realize how personal finance differs depending on class.
How Normal People Spend Money
The average person treats money as a straightforward transaction with the mentality of, “I work, and then I spend.”
Their personal finance is likely to go into one big pot at the beginning of the month until it dwindles and is finally reset on payday.
Most people engage in this cycle for the rest of their lives, being ecstatic on payday, sad during a long working month and generally envious of those items they can’t quite afford to buy. We call these types of people those who “live to their means.”
This attitude is seen all over pop culture – due to the mass amount of people who relate to it. If your Facebook feed hasn’t been full of payday memes at the end of the month, where have you been?
Meme by me.me
Living within your means is definitely better than living beyond them (which inevitably leads to debt) and is seen as a generally positive way to handle your money. However, this is not how rich people use money.
How Rich People Use Money
If poor people see money as a transaction, rich people view money as a tool.
Rich people will continually live within their means – not to or beyond them – with money left over after their spending activities at the end of the month (which is understandably easier for people who have more money coming in).
These people treat their disposable income in a business sense (remember the term, working capital?) with the mindset that not every cent has to be spent before payday.
As we mentioned at the start, rich people also “use” money, rather than just spend it. With money as a tool, they aren’t afraid of debt, with the ability to differentiate between bad and good debt and they’ll also build credit ratings, invest money and make smart saving decisions.
Rich people will generally figure out ways to multiply their money without having to do any labor. An example of this would be making a smart investment and then earning interest or return on their original pay-in.
Even richer people will multiply their money without doing the labor themselves and getting other people to do work for them. The elite (the very top of our social hierarchy) represent this group who are solely responsible for and in charge of production. This way their money-making scheme is not limited by time but rather by demand.
Meme by Know Your Meme
As they’ll often have access to static pots of money that aren’t being spent in the short-term, the rich will be able to take advantage of saving schemes for the long-term, such as the most popular retirement scheme in the US, the 401(k). In these systems, individuals are rewarded for holding money in pots which aren’t accessed for a certain period. As a bonus, third parties including the government and private companies may contribute to the sum.
As a general rule, personal finance and business finance are very different and should be treated separately. But the elite practice the same type of discipline with their personal account as they would with their corporate account. The key difference between the rich and the rest of us is that they wait for delayed gratification. In simple terms, they don’t parade around with a Shetland pony on payday.
5. Business Finance Is a Public Affair
While you wouldn’t dream of asking a stranger or even your boss how much they make in a year when it comes to business finance no stone is left unturned.
If you’re an employee (be it a self-employed person or someone who works for a company) what you make stays between you and your employer or client. But when it comes to business finance, your company’s finance becomes a public spectacle.
Why Are Business Finances Made Public?
Public companies hold a lot more responsibility to disclose financial information than private companies do. However, both are required to fill out certain documents which are then made available to the public.Financial documents help to show a business’s activity and its impact on society. In a public company, financial information helps outside parties to determine the worth of a company. For example, if a company is on the stock market, investors will need to check the financial health of a company regularly.
How Does This Impact Me?
As a business leader, figurehead or entrepreneur, your actions are scrutinized as people can often come to an educated conclusion about how much you earn from your company.
We’ve seen this in the case of Sir Phillip Green who was publicly criticized about his tax avoidance and dividend payout in several public companies. Essentially, if everybody knows what you’ve got, they can easily assess whether they think your behavior is suitable.
Meme by memegen
Although company owners have access to a bigger bank balance, they also carry a heavier social responsibility. Should you buy that yacht if you haven’t met your quarterly projections? Should you be seen in that Ferrari if your workers are struggling to afford housing?
Not having enough money is quite clearly an issue, but having too much of it can also come with its own complications. We’ll finish with an insightful line from The Notorious B.I.G which will maybe make wish you hadn’t learned so much in this blog – “mo money, mo problems.”
Rory Whelan is a communications expert with over twenty years experience in consultancy, television, media and telecoms. He writes articles frequently about the benefits of business phone plans for corporate leaders who are on-the-go and in need of increased flexibility or remote access.
Since 2012 he has held the role of marketing manager for eReceptionist, leading the product to become the favourite call management company for UK SMEs. The solution attracts a wide range of small businesses allowing them to manage their professional image whilst gaining a virtual office address and thus relieving them from a singular physical location.