Business owners caught in the credit card trap
I was alarmed to read in MYOB’s latest SME Snapshot that almost half of respondents had one credit card they use for both business and personal expenses. In my mind that’s a recipe for disaster.
Too often I see business owners wondering why they can’t seem to get their cash flow flowing… only to find personal spending from the business account is to blame. The old adage the more we earn, the more we spend is central to many financial problems… this is magnified with credit cards, where you don’t even need to earn it to spend it.
The first step in avoiding this trap is to get a clear understanding of your spending habits; so I urge you to clearly separate your personal and business transactions, for a number of reasons:
- To accurately track and manage expenses (so you can compare transactions to your budget, and remain on track towards your business and personal wealth objectives)
- Track tax deductions to make it easy at tax time (and ensure you don’t miss any)
- It’s the first step towards shifting your mindset towards building a self-sufficient business (one that doesn’t rely on you)
If you need help to do this, there are a range of online tools to help you better understand your finances, keep control of your spending, be more productive and reduce financial risk. Features such as MYOB smart bills enable you to actively store and manage all your bills and expenses so you can understand your spending activity.
How I use credit cards for business transactions
Credit cards are awesome – if managed correctly. Here’s how I do it.
I have three credit cards:
- Work card: I use this for everything tax-deductible that relates to the business
- Personal card: for all non-work-related activities
- Other work-related tax-deductible expenses (not related to the business): for things like motor vehicle expenses, stationery, and work related education expenses
I find that this separation makes me far more efficient in tracking expenditure and managing tax deductions. And as there’s no temptation to use the business card for personal use, I have a crystal-clear understanding of my business spending.
Tip: Ensure the cards are all in your name (not the business) – you get more rewards points that way.
Credit cards and bottom-up budgeting
Any business worth its salt should develop a bottom-up budget each year. Rather than traditional budgeting (basing this year’s profit figure on last year’s revenue), start by setting your desired profit amount (independent of last year) – so you don’t limit your thinking, and can set a ‘stretch target’ that forces you to find the extra revenue to fund growth. Then determine the revenue and expenses required to achieve this stretch profit target.
Critically, you need to track performance each month to ensure you’re on target to reach your goal (or take corrective action). Your monthly credit card statements are a great way to cross-check activity against budget, and ensure you stay on track.
Run your personal wealth creation activities like a business
Financial management shouldn’t be confined to your business. I argue households should treat their finances like a business – the ‘family business’ of growing your personal wealth. This needn’t be too involved; a yearly budget, and monthly review of credit card statements to ensure you’re on track, is a great start to fuel your family’s future.
Convenience costs you
The last thing we feel like doing is shopping around for cheaper insurance or a better rate on your mortgage – but I argue overcoming convenience and making a few calls to check out better offers elsewhere, or to negotiate with existing providers, can generate huge savings. The important thing is to ask – chances are a provider won’t offer you a better deal from the goodness of their heart.
I urge you to take it a step further: take one annual leave day off a year*, and use it to review your financial affairs: ask for a better mortgage rate, haggle with your insurance providers, shop around for electricity and internet. I believe the average person could generate a month’s salary worth of savings in one day (off). Now that’s a productive use of time I reckon.
*I believe it’s critical that business owners treat yourself as an employee by getting a salary and annual leave days… but that’s a whole other blog post.