There is a common misconception among new business owners that your personal finances are completely separate from your company finances. This is true to a certain extent, but many a time, the habits you cultivate with your finances translate into business practices.
Moreover, effective management of personal assets helps in making good decisions for your company, and you will never find yourself dipping into funds to catch up on private bills that you could have directed towards growing your business.
Below, you will find four critical blunders in personal finances that could seriously endanger your company.
A Poor Credit Score
TierneyMJ/Shutterstock: Poor credit score
Your credit score is essential in determining your eligibility in securing personal loans, credit cards, and even business loans. It can also influence the kinds of rates banks offer you.
A good credit rating reflects a responsible, money-smart business owner. A poor rating not only reflects negatively on you, but it could also disadvantage you in terms of funding for your business.
Many contributing factors influence your credit score and many models by which it can be calculated. Total credit usage, available credit, and balance are important factors worth monitoring.
High-Interest Debt
William Potter/Shutterstock: High-interest debt
Debts are almost inevitable for inexperienced business owners. However, high-interest debt is not a good look for potential investors. It makes you look unstable as a businessperson, and brings hesitation to investments, as you could potentially end up buried under exorbitant interest.
Credit card balances and payday loans are notorious for their high, accumulative interest rates. If you have debt in these areas, begin making a diligent effort to pay them off as quickly as possible. Due to the nature of these debts, the longer you take to repay them, the more it will cost you.
Lack of Emergency Fund
Alex Hinds/Shutterstock: Lack of Emergency Fund
The current Covid-19 situation worldwide has highlighted more than ever the need for business owners to be prepared for a rainy day.
Right from the beginning, set up and grow an emergency fund that can ideally cover up to 6 months in essential expenses. Make your calculations based on whether or not you have another provider in your household to supplement your income, and how much of your earnings you can save each month.
Do not tap into these savings until absolutely necessary. You can also consider different types of business insurances that cover a range of emergencies.
Failing to Separate Your Accounts
This is an easy mistake many entrepreneurs make, but it can be a costly one. Channeling customer payments into the same account, you dip into for personal expenditure can bring about all sorts of problems in terms of accountability.
It can make accounting extremely challenging, and if you are an employer—then also prevent you from maintaining transparency with your employees at the risk of compromising your privacy.
Instead, right from the get-go, invest in a separate account for your business. Transfer a portion of your monthly business earnings into your private account as a ‘salary.’ Not only will this help you with bookkeeping, but it will also be easy to gauge how your company is performing and growing.
When running a business, keeping the private and the professional separate is of paramount importance. However, when you are the face of your company, your personal financial habits can influence not only your reputation but also the approach you take towards managing your company. Hence, it is highly advisable for you to cultivate good habits with your money right from home.
