Everyone preaches the value and importance of keeping your business finances and personal finances separate. What they don’t tell you is that if you don’t have a strong grasp on your personal finances and a solid foundation of financial habits, your business is going to suffer as a result.
You could have the best intentions to treat your business differently, but at the end of the day it never goes well.
A lot of entrepreneurship is learning as you go. Take advantage of the information here to get a better understanding of why you should step back and take control of your personal finances, and make sure that you have plans to keep them in control so that you can give your business the attention that it needs (and deserves).
How Your Personal Financial Habits Affect Your Business
For starters, if you don’t have control over your personal finances, your mind will be occupied and your life will be stressful.
This will not give you the best capability to be the creative, focused entrepreneur that you should be. Been there, done that.
If things become desperate, you could even run the risk of using business funds for personal expenses.
It can be tempting to know that the money is there, but remember that it is there for a reason.
The money in your business needs to be used for your business. Give yourself payouts quarterly or yearly on top of a salary if you can.
People who are out of control in their personal financial lives are likely just as hindered in their business growth because of financial issues. It is nearly impossible to have chaotic personal finances and run a business with clean books and a strong financial foundation.
Starting a business is volatile. It involves a lot of risk and a solid money management strategy for that starting capital. If you don’t have financial restraint in your personal life, how can you expect to hold yourself to that standard for the business?
Secrets of the Most Successful Entrepreneurs
Some of the most successful entrepreneurs, CEOS, CFOs, and business owners are in their positions today because they started with a strong personal financial management plan that allowed them to get into their role.
This not only makes it easier to start out in business and get the funding that you need, but the habits you carry can translate into your business activities and allow you to hit the ground running with a solid financial foundation.
Here are 6 practices of the most successful people and companies in the world:
1. Constantly Educating Themselves
A lot of people don’t think about learning about money until they start a business. Even then, they may focus solely on learning about business financial matters. There is so much to learn about finances, both in regards to your personal life and your business, and you need to take advantage of that. The most successful entrepreneurs are always seeking education and the opportunity to learn more about how to better manage their money and ways to make it grow.
2. Not Counting Chickens
People who have a steady income from employment with regular paychecks or deposits often come to rely on that income. They’ll even go so far as to spend extra or borrow from savings because they know a big check is coming or a bonus is around the corner. This can be dangerous when you start a business, though, because you never know exactly when the money is coming or how much it will be.
Never get ahead of yourself when it comes to your spending, even if it’s in reference to bills and necessary expenses. Make a budget that works by allowing you to determine exactly how to proceed once the money is available.
3. Looking at the Bigger Picture
Short-sightedness is one of the most dangerous risks of poor money management. Those who are successful in business and their finances understand the importance of the big picture. You can no longer rely on weekly or bi-weekly paychecks. You have to look out to a month-by-month plan and set the budget accordingly. In business, it takes time for money to come in. The best entrepreneurs adjusted their goals accordingly when first starting out, and continue to adjust for the future as they go.
4. Keeping All Finances Separate
As mentioned at the beginning of this article, it is the golden rule of entrepreneurship to keep business and personal finances as far away from each other as possible. People who are constantly mixing the two risk ruining their business or losing their personal assets because the business fails. By having solid money management skills, extensive knowledge, and the help of a reputable financial advisor and planner, it’s easy to keep things separate and understand why that matters so much.
Considering that nearly 1/5 of all business owners do not have a separate account for their business and personal banking, it cannot be said too much. Make sure that your personal money and your business money are separate, in every way, and at all times. Have other plans for emergencies or contingencies so that the option of mixing them doesn’t even arise.
5. Always Making Deals
It’s often said that the richest people are usually also the cheapest, and it is often the case. People who are financially successful appreciate the value of a dollar and they are always on the lookout for a good deal.
Whether you become one of the people who never pay full price for anything or you just know who to call when you need a good price on something, you have to take advantage of deal-making and professional networking.
6. Learning from Small Mistakes
In business and in your personal finances, things go wrong from time to time. You might even make some poor choices or bad investing moves. Regardless of what happens, though, you need to learn from these mistakes so that you can move forward in your personal and professional life with a positive attitude.
People who are successful in business learn the first time and take smaller risks to help them prepare for the bigger risks that are often unavoidable. There is always going to be risk in business. By learning how to grow through smaller mistakes, there will be a much lower impact on the bottom line.
Put Your Personal Finances on Autopilot
While you are investing all of your time and energy into your business, it might be a good idea to put your personal finances on auto. There are a variety of resources and tools that can help you automate bill payments, deposits and transfers, investment activities, and more. You can also hire a professional financial advisor that will offer real support and financial education, while also managing your money.
The Legalities of Comingling
Legally speaking, when you mix your business and personal finances, it is known as commingling. Aside from the personal risk involved, there are actual legal consequences involved in mixing the two. Some of the legal issues that could arise include things like:
- Risk: If your business has a financial health evaluation for any reason, someone is going to note a red flag when they see that your accounts are all combined. Lenders, vendors, investors, credit bureaus, and anyone else in a position to offer a professional financial relationship could see this information and it never looks good.
- Liability: In the event of a lawsuit or claims made against you or your company, you need to make sure that your personal assets are protected. When your business isn’t separated from your personal finances, you could be putting all of your assets on the line, including your home, cars, cash, and other items of value.
- Fines: A lot of people who don’t separate their finances find themselves making simple errors on their tax returns. This is usually not a big deal, but when it is noted that your finances are mixed together, it could result in some serious fines or penalties. Plus, when you have to refile or request an extension, interest may also accrue over time until the fines are paid in full.
Making Personal Habits Professional
When you already have a solid financial foundation in your personal life, it will be that much easier to manage business finances without a lot of issues. You will need to make sure that you adjust accordingly for the different financial issues and needs, but ultimately your goals and habits can remain the same. Here are some of the top tips to help you improve your personal finances and grow your business at the same time.
- Spend wisely and grow slowly. Most new businesses don’t have a lot of capital to work with, so you’ll need to be in that frame of mind for your personal finances and your business. Forget about frivolous expenses and things that you don’t need. Spend only what you have to, and learn how to grow into your finances.
- Know your responsibility. Even if you’re a sole proprietorship, you could be liable for a number of different expenses and situations. People like to sue, so you have to minimize exposure. You could also spend a fortune on benefits for employees if you aren’t careful. Look into appropriate business insurance and understand what your liabilities are, both personally and as a business owner.
- Understand cash flow and how it works. One of the biggest reasons that businesses fail is because of a lack of appropriate financial management. You need to be aware of your personal and business cash flow, including how you can maintain current expenses and income. You should never just spend money unless you know that you have it to spare.
- Have emergency funds in place. In your personal life and your business alike, there are going to be eventual emergencies. You need to have funds set aside for that. You need to make sure that you have separate emergency funds for your personal life and business finances, such as a business credit card and a personal savings account, or vice versa. Just remember, cash is always best.
The Power of Investing in Yourself
Here’s where things get a little muddy in terms of keeping things separate. You should never take money from the business to fund your personal needs, outside of the salary that you draw (if any). You should also never use personal funds that are reserved for your day-to-day expenses to finance business needs. However, investing in yourself is a different story.
If you have personal funds that you’re looking to invest, consider investing in your own business. In the event that there’s excess from the business, put it back into the company and do things you wouldn’t have done otherwise. When you have a solid grasp on both your personal and business finances, it’s easy to do this and it’s a great way to help yourself and your brand grow.
When you have the appropriate financial tools and habits to manage your personal finances, it just makes it that much easier to develop good habits in business. Remember that you’re not reinventing the wheel, here, either. The entrepreneurs that have come before you have already laid the path, as seen in the tips above and throughout other resources, including plenty of financial planning advice and business financial assistance.
The best thing that you can do is to have a plan in place and utilize goal tracking resources to stay on top of all of your finances. If you are struggling or need more energy and resources to focus on your business, consider automated tools or hiring someone to manage your personal finances for you. Most importantly, never stop learning because the financial world is always changing and you need to stay on top of things for yourself, and more importantly for your business.