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Don't Fall Victim to the Triangle of Entrepreneurial Finance

February 6, 2009

This article has been excerpted from Ultimate Guide to Personal Finance for Entrepreneurs by Peter Sander with J. Jeffrey Lambert, available from Entrepreneur Press.

Business operations, business finances and personal finances are inexorably linked in the triangle of entrepreneurial finance. Decisions and actions at one point in the triangle will most likely--in at least some way--affect a decision made in another. Some of these influences are obvious; others are more subtle. But like a balance equation in chemistry or physics, there will always be an effect. The question is how large an effect?

For example, the effect of an operational decision to hire employees has an obvious effect on business finances--wages or salaries paid, benefits paid, insurance covered, facilities required. But does this decision affect your personal finances as an entrepreneur? Obviously it might affect the cash flow you take from the business, but hopefully not much, as the ROI of these new employees should be positive. But more subtly, the number and kind of employees you have can affect the choice of retirement plans and employment benefits and, in many cases, open up options and alternatives for your own personal retirement plan. The employees may also help you qualify for group insurance plans or for better plans than you have already. That's the kind of effect we're considering.

Let's take a moment to examine the points of the triangle and how the pieces fit together.

Business Operations
As an entrepreneur you will make hundreds to thousands of operational decisions in setting up an infrastructure and producing your product or service. All decisions that involve money involve the finances of the business, of course, and many, like employment and facility decisions, will affect your personal finances as an owner. And these decisions are never finished: They will adjust and evolve as your business evolves--and so will your business and personal finances. Business operational decisions include the following:

Business Finances
The term business finances refers to the assets, liabilities, capital, revenue and expenses of the business. For you, "expenses" may or may not literally include taxes, but however you want to slice it, taxes and tax considerations obviously have a big impact on how businesses are organized and run. These financial components are tightly intertwined with each other and with the operational decisions made by the business.

Personal Finances
For now it's sufficient to say that personal finances include the income and expenses and the assets and liabilities of the individual entrepreneur and his household. Within those parameters, individual personal finance includes managing cash and money, setting short- and long-term goals, and putting plans in place to achieve those goals. Here are some important pieces to the personal financial puzzle and how they relate to the operations and especially the finances of the business: