10 Personal Finance Rules Every Small Business Should Live By
Managing your small business’s finances isn’t as daunting as it may seem. While there is certainly a learning curve in any new business venture, and you’ll likely need some expert support along the way, managing your business expenses is often informed by the way you manage your personal finances.
Jennifer McDermott, a consumer advocate for Finder.com, points out that it’s not uncommon when running a small business to dip into your personal savings, particularly when you’re first launching your business. It also might be that your business and personal bank accounts merge more closely than you might be comfortable with. As your business grows, it’s important to keep your personal and business bank accounts as separate as possible.
That said, some of the age-old rules that apply to your very own savings and checking accounts apply to handling your business’s finances. Here are 10 expert tips to keep in mind while managing your business, which might seem awfully familiar.
1. Track your actual cash flow
Nate Masterson, finance manager for Maple Holistics, recommends creating a spreadsheet to monitor and track your monthly cash flow. This way, you can ensure you have the money available in your ledger. “You can’t spend money that is owed to you until you have it or you have enough credit to fill in the gap until the funds clear,” says Masterson.
By tracking your actual cash flow, it’s much easier to monitor how much cash your business is producing each month. Then you can decide the best way to apply that available cash instead of your net worth.
2. Avoid debt regret
What is debt regret? According to McDermott, you should first ask yourself what you actually need to finance your business. McDermott pointed to a study conducted by Finder stating that 7.3 percent of Americans with debt-related regret said that borrowing money for a business investment was their biggest mistake.
As with any loan, McDermott recommends only borrowing what you can reasonably afford to pay back within the agreed-upon terms. This is true in your personal and professional life. Loans are an obligation that you must repay – not free money.
3. Keep an emergency fund
McDermott also points out that while most people are aware they should have a personal emergency fund set aside for the unexpected, business owners should do the same for their business. “Whether it’s to pay the rent or payroll when a debtor fails to pay on time, give your business a buffer to make it through tight cash-flow moments,” she says.
4. Learn how to budget
Masterson says that while there are a wide number of different financial tools and principles a business might use to succeed, his No. 1 suggestion is simply to budget correctly. Failing to create an accurate budget (or one that is realistic based on the costs and demands of your business) will cost you big time.
Kevin Ward, President of Park + Elm Investment Advisers, agrees: “Most of the time, you can draw up a budget based on the reflection of your accounting. By using your ledger, you can distribute cash to the places that need it the most in your business as well as focus on investing in new employees or technology that may help grow your revenue and improve your cash flow.”
5. Take meticulous care of your records
McDermott says that having accurate, up-to-date records is imperative for managing cash flow. If bookkeeping isn’t your strong suit, hire someone else to handle it. You don’t need to pay a full-time accountant, but investing in a remote or part-time assistant can help your business run smoothly.
6. Invest in your future
Jeff Proctor from DollarSprout.com, a personal finance media company geared towards millennials, says it’s easy to get caught up in the day-to-day processes of your business and lose sight of long-term goals. Proctor recommends making a habit of consistently reinvesting a portion of your business’s profits into things like additional training for staff, development of new products and anything else that will grow your business.
7. Spend less than you make
Proctor also says that while it seems like the simplest rule of them all, many business owners lose sight of maintaining a positive cash flow, especially companies that consistently depend on new rounds of funding to operate. “For new small businesses, the priority should be doing whatever it takes to generate positive cash flow consistently,” Proctor says.
8. Think about taxes
Kevin Ward suggests planning ahead for tax season by acting as if you were a W-2 employee. “Stash away 35 percent of everything you make to set aside for taxes,” says Ward. He adds that business deductions likely will cause your tax bill to be lower, which means there’s a good chance there will be some left over as a bonus. And who doesn’t love a bonus?
9. Build a flexibility fund
Ward also points out the inevitable: Some months you’ll do better than others. “When you have a month in which you double or even triple your typical income, take out a percentage for taxes, retirement, and emergency funds. Give yourself your salary, and put the rest in what’s called a flexibility account.” This will ensure you’re taking care of priorities while also prioritizing savings.
10. Don’t forget retirement
Finally, Ward says you can never plan too far in advance. “Consider setting up a Simplified Employee Pension (SEP), if you have no employees, or a Simple IRA Plan, if you have employees,” he says. “These low-maintenance, high-contribution-limit plans allow business owners without a 401(k) option to save more aggressively than a traditional IRA allows.”
Managing your personal and business finances can feel overwhelming. And although there are many differences, these 10 basic finance principles can help stay on track and thrive in both financial arenas. Remember, learning more about business finance or investing in professional help may feel like a big commitment or upfront cost, but it pays dividends in the end.