As a small business owner, it’s important to keep your personal finances separate from your business finances. But there are definitely some important personal finance skills that will transfer over well to the running of your business. If you haven’t mastered these skills in your personal or business financial life yet, now is a great time to start.
1. Live on a budget
The number one thing you can do to be in control of your money – both personal and in your business – is to live on a budget. The word “budget” is unnecessarily vilified in our society. Too many people think of rice and beans, never doing anything fun, and generally spending as little money as possible when they think of living on a budget.
But the truth is that living on a budget simply means planning your spending – whether you spend a lot or a little. So when it comes to your business, take control of your expenses by setting a budget. Run your business as much as possible out of your revenues, and stick with your budget. You’ll be amazed at how quickly your business can flourish when you really take control of its number one resource – its income.
2. Separate wants from needs
If you’re going to live within your business’s means and stick to a budget, you’ll have to learn to separate wants from needs. Most adults are fairly good at this in their personal lives. You know you want a giant big screen TV for the family room, but you don’t trick yourself into thinking it’s something you must have to survive.
The same should be true for small business owners, though it often isn’t. Too many small business owners, especially when they’re starting out, get caught up in having all the extras – be that unnecessary equipment, bells and whistles technology, or even extra employees. But when you spend too much on the wants, you won’t have enough left over to cover the needs – like utilities, rent, and marketing. So before you spend a dime on any non-essential item for your business, take the time to determine whether you really need it to improve your business, or whether you just want it.
3. Diversify your income
The most successful individuals money-wise usually have a diverse income. This could include income from a regular job, a side business or part-time job, investments, savings accounts, etc. And while you may want to focus tightly on one single thing when it comes to your business, a diverse income isn’t a bad thing here, either.
Many small businesses, in the quest to focus tightly on a niche market, end up paring down income streams too much. Whenever possible, try to offer complementary services or products, or diversify your business income in other ways. That way, if one piece of your market suddenly dries up, you’ll be able to keep your business afloat.
4. Keep debt down
About half of small businesses fail within their first five years of operation. Many of these businesses fail because they carry too much debt too quickly. While almost all businesses carry some sort of debt – without which it would be difficult for them to find the capital to grow – carrying too much can be a death sentence, just as too much personal debt is difficult to deal with when it comes to your personal finances.
The Western Australia Small Business Development Corporation notes that acceptable debt ratios for small businesses are between 1:1 and 4:1. This means that small business owners should expect to carry between $1 and $4 of debt for every $1 of equity they have in a business.
Whether or not that 1:1 to 4:1 ratio is right for your business, though, depends on many factors. If you have very high non-debt expenses – rent, utilities, payroll, etc. – less debt will make it easier for you to pay your business’s bills each month. If you need a big push to get your business moving or to roll out a new product or service, you may need to take on a bit more debt for a time.
Regardless of how much debt is reasonable for your business, it’s vital that you handle debt properly – and that you don’t carry super-high balances all the time. The flexibility of a business credit card, like Chase Ink Business, is often a good option for small business owners, though you do want to watch your spending extra closely, since it’s easier to overspend when swiping a card than when writing a check or paying cash.
5. Create good credit
Building good credit for your small business is as important as building good credit when it comes to your personal finances. By creating excellent credit for your business, you’ll put yourself in a position to borrow money when you need it in order to move your business into the future.
Luckily, you can borrow the steps for how to create good credit for your business from your personal finances, as well. It’s as simple as paying all your bills early or on time and not carrying too much debt, especially on revolving accounts like credit cards.
6. Prepare for emergencies
Finally, it’s just as important to be prepared for financial emergencies in your business as it is in your personal financial life. If you don’t already have an emergency fund for your business, it’s time to start one. While using credit cards and loans for intentional spending on your business isn’t necessarily a bad thing, you don’t want to fall back on debt if you get into a financial pinch with your business.
For this reason, you’ll want to have an emergency fund large enough to cover your business’s essential expenses for a few months, should you lose revenue suddenly. You don’t have to completely fund your emergency fund right away. Instead, you can build it up slowly by depositing a set amount or percentage of your business’s revenue into the fund each month until you reach your goal.
While managing a business’s finances can be more complex than managing your own personal finances, the two really aren’t that different. Sure, you might need an accountant to help out with your small business finances, but as the business owner, translating these six personal finance skills over to your small business will help you succeed more than almost anything else.
Author: Daniela Baker
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