SmallBizLady: Why is it important to have a handle on your personal finances as a business owner?
Kemberley Washington: Few of us think of our personal finances as a small enterprise, but just like any business or government agency, we must watch our personal bottom dollar. Before we can efficiently operate our business finances, we must have a handle on our personal finances. The best way to achieve this is to get organized. You have to ask yourself a few questions:
- Whom do I owe?
- Who owes me?
- Are my finances in order?
- What steps can I take to get my finances in order?
- What am I worth (assets – liabilities)?
SmallBizLady: What is the best way to get organized?
Kemberley Washington: When it comes to your personal finances, having a system in place is key. I created some time ago the B.A.D.G.E. planner. A planner designed to help you create your budget, track and plan your spending, determine your net worth and define your financial and earning goals.
After seeing clients, family and friends attempting to get a handle on their finances and failing, I decided there were five necessary steps that should be in place to obtain a financial healing. These steps include: budgeting, assets, debt reduction, goals and earnings – The B.A.D.G.E.
SmallBizLady: On your blog you often talk about “Wearing the B.A.D.G.E.” Explain these principles.
Kemberley Washington: For starters, periodically (twice per month or weekly), you should sit down and take time out for your finances. It first starts with creating a budget. I know budgeting may not be what many people love to do, but know that creating a budget and attempting to stick to it can help you save money in the long run.
Second, you should track your assets. When we think about earning money, we neglect to consider our net worth. I often say, “Income is great, but net worth is better!”
Next, you should consider reducing or eliminating your debt. If you have thousands of dollars in debt, it essential to create a debt reduction plan to reduce or ultimately eliminate it.
Finally, the last two parts of the B.A.D.G.E. are to set financial goals and find creative ways to increase your income. I like to refer to it as creating a “side hustle.”
SmallBizLady: I like the thought of creating additional income. What are ways business owners should consider this?
Kemberley Washington: Having different streams of income is essential. No matter how big or small, consider different ways to earn more. It is a great idea to create passive income products. These products will enable you to earn income while you are sleeping. This could be developing electronic materials, such as e-books, online classes, apps or other materials that align with your business and financial goals.
SmallBizLady: You mentioned many people do not like to budget, are there alternatives?
Kemberley Washington: I can’t say it enough. Having a budget in place is essential. While many people may not enjoy tracking every dollar, I do encourage others to consider what I like to refer to as the ABCs to budgeting. This is simply separating your cash into three money piles, such as:
- Allocating for savings,
- Budgeting for bills, and
- Cash for everything else.
For instance, if you earn $1,000 per pay period, you may consider allocating $150 for savings, placing $700 in the bank to cover recurring bills and necessities, and utilizing the remaining $150 for discretionary expenses.
SmallBizLady: You mentioned as part of B.A.D.G.E., you should reduce debt. What are ways individuals can achieve this?
Kemberley Washington: Most often when people think about paying off debt, they think of it is as an impossible task, but this does not have to be the case. When I found myself after college in thousands of credit card debt, I knew something had to be done.
I first started with my “come to Jesus” meeting and literally wrote every debt on paper. From there I listed various ways that I could earn additional income to reduce my debt. These amounts were over and beyond my regular cash flows. I then listed the amounts on the debt reduction template and planned for a year in advance. During the year, I kept the paper with me and was able to get out of debt by year-end!
SmallBizLady: Why is it important to have a money plan?
Kemberley Washington: Not only is looking at your expenses important, but understanding and planning for revenue are equally important. If you are in business or considering to transition from employment to business, you need to have an understanding of what income it will take to supplement your current or future lifestyle. It is also gives you a goal or plan of how many products to sell or services to provide. This way you have a benchmark of whether you have met or come close to meeting the mark.
SmallBizLady: As a CPA and former IRS agent, what should business owners consider when thinking about personal finances and taxes?
Kemberley Washington: It is a great idea to have separate bank accounts for business and personal finances. Separating your money into these accounts are great when tax time comes around. This will help you to quickly review your business statement to identify expenses made throughout the year – all in one spot. If you commingle your funds, it may take some time to identify your business income and purchases.
SmallBizLady: If a business owner has commingled their funds with their personal finances what can be done?
Kemberley Washington: Many times, small business owners may utilize personal accounts for business purchases. Prior to preparing tax returns, owners should consider reviewing personal bank accounts and credit card statements to determine whether purchases were made for tax-deductible expenses. Identifying these expenses can greatly reduce your tax liability or increase your tax refund.
SmallBizLady: You wrote an article about your experience with hurricane Katrina; tell us the financial lessons you learned?
Kemberley Washington: One of my biggest lessons early on was Hurricane Katrina. Not so much about the hurricane itself, but the financial lesson I learned as a result of it. It taught me that you should save no matter what! We often talk about planning for a “rainy day.” Well, that was definitely a rainy day! However, by me applying the B.A.D.G.E. principles and allocating a portion of my pay to savings, I was definitely prepared. More importantly, as a CPA I was also prepared by having my tax returns up to date. However, many people were not. One of the requirements at the time to obtain federal loan assistance for small businesses was to provide copies of tax returns. It is very important business owners keep their tax filing requirements in mind when operating a small business.
SmallBizLady: What are ways to allocate savings?
Kemberley Washington: There are many great ways to allocate savings. First, I would say make certain it goes into an account where you have little to no access. Having it in these accounts may make it a bit more challenging to use the money for a “one day” sale or something that can wait for another day. Next, make certain you are saving a consistent amount periodically. It is not enough to save a few dollars every now in then. Saving becomes effective if we treat it as a bill. Meaning, we save the same amount each and every month.
SmallBizLady: What are some financial pitfalls to avoid?
Kemberley Washington: While there are many financial pitfalls, I believe there are a few that can cause pitfall!
- Not partnering with God as a partner for your finances and tithes.
- Not taking time to check on your money periodically and consistently.
- Moving forward without a plan (remember, it doesn’t have to be complex, but having a vision for your finances can help you along the way).
- Taking on debt without first considering alternatives (putting off large purchases if possible, saving for it, increasing income or selling assets to make purchases).
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