If you think of your business as an extension of yourself, it’s easy to see how important it is to follow the same finance rules as you would for your personal financial health. Consider for a moment what would happen to your household if you had no cash on hand (cash flow) to pay your monthly bills. You’d probably have the bank foreclosing on your mortgage loan, your vehicle repossessed by the lender, and all your utilities would quickly be disconnected. You can’t go more than a month or two without meeting your financial obligations and neither can your company.
1. Cash on Hand vs. Debt
As mentioned above, having cash on hand to pay your debts is of vital importance. Therefore, the one thing you want to track at all times is your business’ spending. Are you spending more than you are bringing in? If so, you have a problem. This is one constant in finance, business or personal, that you will need to live by. In addition, if you want to grow your business just like you want to grow your personal savings account, make sure you are bringing in more than you are spending.
2. Keep Debt to a Minimum
Sometimes referred to as ‘debt regret,’ this is where you go into debt unnecessarily. Just like you would with your personal finances, learn to differentiate between the needs and the wants. If you need something to keep your business afloat, then a small business loan could be necessary. However, if you simply want a new company vehicle or to redecorate the offices, that could be a frivolous expense you can do without. Are you in need of a critical piece of equipment or money to order new materials to complete a customer’s order? Then, by all means, apply here for small business loans.
3. Create a Realistic Budget
Perhaps this should have been the first tip! How can you know if you are spending too much if you haven’t made a budget? If you don’t know how much cash you have on hand weighted against your current debts, there is no way to budget for the future. Make sure the budget you set is realistic with more money available for those things necessary for the operation of your business.
4. Build an Emergency Fund
At home you might call this a ‘rainy day fund,’ but the principle is the same. Always set some of your business’ earnings aside in an emergency fund, so that you can draw from it if a true emergency should arise. Repair and/or purchase of broken machinery would be one instance in which you would confidently be able to draw from that fund. On the other hand, new office equipment might be a frivolous expense if the machines you have are still operational and in good repair.
You have put your blood, sweat, and tears into your business and like your home, it is an extension of who you are and what you do. In fact, your business finances are probably even more important than your personal finances because it is how you make a living. While thinking of personal and business finances in much the same way, just remember to keep them separate. Commingling of funds can be grounds for financial disaster. Think in terms of parallel paths and you’ll do just fine.