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PRACTISE SEPARATE ENTITIES

Kevin worked hard at his fish-selling business. Every day, he used his 80 dollars of working capital to purchase 60 kilos fish at the market. He than spent the day selling the fish to families in his neighborhood. The average daily profit (the difference between what he spent on the fish and what he earned by selling it) of 95 dollars was enough to buy food for his family of five. On really good sales days, when the profit was more than expected, Kevin would take the extra money home for his personal use.

One day, the unexpected happened- Kevin’s wife got sick. The Doctor said her condition could be treated only with fairly costly pills. Kevin used all of the business working capital (money needed to start a business and buy inventory for the business to sell) to pay the Doctor’s visit and his wife’s much-needed medicine. With no money left to buy inventory, Kevin could no longer buy fish to sell. He was out of business.

Kevin’s choice was clearly easy one to make. Few people would fault him for choosing to care for his wife rather than save his business. But lesson’s to be learned from Kevin’s experience is that this kind of problem can be avoided. If Kevin has followed the counsel to practice separate entities-to keep business money separate from personal money-he could have started saving long ago in order to be financially prepare for on going business expenses as well as for emergency personal needs.

The Principle- Practice Separate Entities

When people decide to start a business, many struggle with knowing how to take care of the money generated by their business transactions. Most view both their personal money and the business money as being in the same pot. The ability to separate business money from personal money is necessary for the growth of the business. Business money and personal money need to be treated differently not only in the physical location of the money, but also in the mind of the micro enterprise owner. The more separation exist between the two kinds of money, the better off the business will be.

After yours business is initially funded (whether trough a loan or trough a investment of personal fund), you must consider the business as a fully independent organization- an organization that is financially unrelated to your personal money. As a micro entrepreneur, you must communicate clearly with your family members and friends to ensure that they understand the separate nature of your business and personal assets. Business money should be used for personal reasons.

One this relationship is understood and established, tread your self as an employee of the business. In other words, calculate how much money you need daily to meet your personal needs, and withdraw that amount from the business as a daily salary. Reinvest the remaining profit into the business. Doing so will allow the business’ operational capital to increase, enabling you to purchase more products to sell. Learn to live on the determined salary and let the working capital compound (i.e., accumulate or grow interest) for the business. As more products are sold, more profit will be generated, and

Your salary can slowly be increased.

Obstacles to Overcome

Two obstacles that prevent business owners from following this principle are (1) Temptation caused by the limited amount of funds available to many micro entrepreneurs and (2) Desires for instant gratification.

Temptations caused by limited Funds

The practice of separate entities is almost nonexistent in micro enterprises worldwide. This situation is largely due to the fact that many micro enterprise owners have very little money to began with. So the thought of not using all of their available money to meet their immediate needs seems foolish. Because they were responsible for initially funding the business, they think of the business’ assets are their own-indistinguishable

From their personal assets. Inventory items are used by family members and friends as if the items were the property of the family, not of the business. Money is sometimes taken straight from the till or cash box for personal expenses. And generally, no record is made of the “transactions,” so the business owner has no way to track the movement of the money or goods that are taken out of the business by family members.

Avoid this obstacles by deciding to practice this rule of thumb before even opening your doors for business. Commit yourself to seeing the business as something that is separate from you and your family, even though your money will be used to fund it initially. By sticking to this commitment, you help yourself resist temptation to borrow from the business or “use” business funds for personal needs. And in the end, your initial investment- if left untouched in the business-will yield large financial dividends for you.

Desires For Instant Gratification

Another obstacle that business owners encounter in managing their separate financial accounts involve the trade off between savings and spending. They struggle to understand how investing money in the business in hope of increased future returns can benefit them more than spending the money now in things they need. They do not understand the relationship between delayed gratification and increased growth.

But in order to be successful, you must be disciplined in setting your salary and than not taking additional money from the business- a practice that will lead to higher profits in the future and to a bigger salary.

Benefits of Applying the Principle

Practicing separate entities has many benefits for both the business and the owner. First, when you keep business funds and personal funds separate and when you consistently withdraw a reasonable salary from the business account, the business can grow. The working capital can than compound (i.e., accumulate or grow interest) for the business. Discipline in practicing separate entities now will lead to increased profits in the future.

Second, living off of a fixed salary serves as a powerful motivator to work hard and improve the profitability of the business. You need to commit yourself to provide sufficient money on a daily basis to support the personal of your family, and then work to make sure that you can do that without relying on the business’ funds. If you know taking money from the business to meet unexpected personal needs will not be an option, you will work harder to ensure that you generate enough income to provide for all of you needs- even the emergency ones that are so unpredictable. When this commitment to practicing separate entities is clear, you will work hard to meet your financial goals.

If practiced consistently, the separate entities rule of thumb will set you on the path toward self-reliance and lifting yourself out of poverty’s grasp.

*Kirra the blue angel*

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