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Small business – divide and conquer?

Author: Yifat Ben-Melech Dahoki
The financial conduct of a small business and a household is very different. Household expenses and income are fixed and relatively known, in business it is much more difficult to control them. Separating the accounts prevents trouble

If you ask a person who works as an employee how much he earns, you will usually get an accurate answer down to the last penny. As employees, we have no problem knowing how much we earn, it’s written on the slip. On the other hand, if you ask a business owner the same question, which is supposedly basic and simple, he is likely to squirm and not know the answer. Sometimes he’ll have a number in his head, a rough estimate, or he’ll admit to us that he has no idea how much he’s earned this month, quarter, year.

There are several main reasons for this:

  • Income is not fixed, it varies from month to month.
  • Expenses are not fixed, they change from month to month.
  • Attributing the expense to a business or family is not unequivocal.
  • The differences between income and expenses are not as clear and unambiguous as on an employee’s paycheck.
  • Sometimes the business owner does not declare all his income for tax reasons, but this leads to confusion in the management of the business itself and the harm outweighs the benefit.

Family-economic spiral

In a family that makes a living from a small business in which the business owner does not know for sure what his monthly or annual profit is, the household also does not know what his income is, and this is the first step on the way to a financial spiral for the whole family. If you don’t know what the income is, you don’t know how much you can spend.

We will try to answer some basic questions that will lead to proper management of the business and the family economy:

  • How can I control and manage my family’s finances?
  • How can I examine and choose my family’s priorities?
  • Does the business serve its main purpose: creating a source of income for the family?

The first and essential stepin order to properly manage the business and family economy is to know what the profit from the business is.

We have often been told that the business account should be separated from the family account, and I do agree with this statement. It is important to emphasize that beyond the physical dimension of separating accounts, the business owner must decide: “I want to better control the business and family finances,” and provide himself with honest answers to questions on the subject. We will expand:

When there is no separation between your business and family accounts:

  • The business account that joins the family account creates a mix of two completely different systems.
  • Business income that is not net income, but invoices before VAT payments, income tax and other expenses, is deposited into the family account, along with the net income of a salaried spouse. This creates the illusion that this is the net profit from the business, that there is money and that it is possible to “spend”. However, these are revenues from which suppliers, employees and various taxes must be paid.
  • Some of the family’s ongoing expenses are recorded as business expenses. The accountant registers this according to clear and defined laws, and what he “manages” to introduce as a recognized expense in order to reduce profits will be a net profit in the business vis-à-vis the authorities, but may create confusion between the family accounts and the business account.

Here are some examples:

  • The daughter assists in filing business material, is the expense manpower for the business or pocket money for the daughter?
  • Purchase of a new printer – is it for work purposes only or mainly for children?
  • Mobile Phone – Is most of the bill for business calls or calls with friends?

In such a situation, there is a real difficulty in separating the expenses, identifying the revenue and understanding the profit from the business.

When there is a separation between the business and the family:

  • Revenue and expenses from your business are managed in one place, so you can generate an average profit over a period of time.
  • The income and expenses from the business are clear and once a month money is transferred from the business account to the family account.
  • The family is not exposed to the large variation in the expenses and income of the business.

When the business succeeds in meeting the needs of the family, there is no real problem. The problem arises when the business has two difficult months, or sometimes several months like this, or when the family is unable to maintain financial balance. If we can separate the family from the business, we will be able to better control both.

In order to make a real separation, it is important to observe two main things:

  • Create two separate accounts or an organized table that the business owner must carefully manage.
  • The business owner needs to be honest with himself, ask the right questions and provide real answers.

To honestly answer whether the expense belongs to the business or family, the following question should be asked: If the business closes tomorrow, does the expense continue to exist? For example, in the examples we mentioned earlier: the payment to the daughter? Printer? Mobile? Is it the business that generates the expense, or is it an expense that will exist in the family anyway? In this way, we can quantify the real expenses of the business and hence its real profit.

calc Lamoran – a calculator for calculating the monthly profit from an independent business

A business owner who conducts himself with a real separation between the household account and the business account and acts honestly and honestly regarding the attribution of expenses to them, does the right thing in order to preserve both the business and thefamily’sfinancesand integrity.

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