Entrepreneur's Diary: How can entrepreneurs strengthen their personal balance sheet? Expert answers

The entrepreneurial spirit is one of adventure, innovation, and often, audacity. While these traits make for disruptive businesses, they also lead entrepreneurs to often overlook the stability offered by a well fortified personal balance sheet. Beyond the world of ledgers, profit margins, and growth rates lies the equally compelling universe of personal finance — a facet often overshadowed by the demands of the business.

Talking about the importance of personal balance sheet, Bhuvanaa Shreeram, co-founder & Head of Financial Planning at House of Alpha (SEBI-registered financial advisory firm), says, "The road to entrepreneurship is fraught with risks and challenges. Yet, as many seasoned business leaders would attest, it's the ability to balance the thrill of business with the prudence of personal financial management that often determines long-term success. In the words of the legendary investor Warren Buffett, 'risk comes from not knowing what you're doing'."

In the dynamic landscape of entrepreneurship, she says that having a robust personal balance sheet is not just about financial security, adding that "it’s about having the foresight and foundation to take calculated risks and leap into the future with confidence."

Bhuvanaa Shreeram suggests these 5 compelling, yet often overlooked, reasons why a strong personal balance sheet should be on every entrepreneur's radar:

1. The Diversification Imperative

The concept of diversification, a staple in investment parlance, extends beyond just portfolio management, says Bhuvanaa. "Entrepreneurs tend to have a significant portion of their wealth tied up in their enterprises. A UBS Investor Watch report showed that over half of business owners lack an exit strategy, potentially exposing them to unexpected market volatilities. Creating a diverse personal balance sheet ensures that an entrepreneur's financial fate isn't solely hinged on the success of their venture," she adds.

2. Liquidity and Financial Agility

Even booming businesses can experience liquidity crunches. "The Financial Times, in an illuminating study, pointed out that cash flow issues were one of the primary causes of business failures. A robust personal financial reserve can act as a cushion during these liquidity crises, offering the entrepreneur breathing room to adapt without resorting to distress financing," she avers.

3. Separation of Risks

The co-founder of House of Alpha underlines volatile nature of businesses and the risk involved to drive home the point, saying, "A study in the Harvard Business Review observed that even the most promising ventures face innumerable challenges. By clearly separating personal and business finances, entrepreneurs can cushion themselves and their loved ones from potential business downturns, ensuring life's personal milestones remain unaffected."

4. Strategic Business Choices

Immediate financial pressures can sometimes force entrepreneurs into making hasty, shortsighted decisions. An entrepreneur with a sound personal balance sheet, however, has the luxury of perspective. "They have the financial bandwidth to look beyond immediate gains, focusing instead on long-term strategic growth – a strategy that tech mogul Jeff Bezos attributes much of Amazon’s success to," she opines.

5. Stakeholder Confidence

In the interconnected world of business, Bhuvanaa says that an entrepreneur's personal financial health often plays a subtle role in influencing stakeholder perceptions. Well-managed personal finances can inspire confidence in potential investors, lenders, or partners about the entrepreneur's holistic financial vision and management acumen.

"Many global business magnates, from tech wizards to manufacturing giants, discreetly rely on financial advisors and firms to steward their personal wealth and ensure legacy creation. This under-the-radar collaboration is a testament to the value such professionals bring, providing seasoned guidance even to those at the zenith of business success," she sums up saying.