Starting a small business can be exhilarating. That is until you realize that the customers are the real boss and you have mixed your personal and business finances to the point where you don’t know where ends and the other begins. Don’t worry! You are not the first small business owner who has ended up in this situation and you won’t be the last. The key to overcoming the problem is to first admit one exists and then take steps to correct it. As such, I want to go over some simple advice on how to keep your business from ruining your personal finances.
Decide on a Corporate Structure
If you are like millions of small business owners, you probably started out with an idea and built everything up from there. This works great early on, as you need to flush out what it is you are trying to do. But once you are up and running you need to decide what type of corporation you want to have, and file the necessary paperwork to make it official.
Not only does this force you to separate your personal and businesses finances, it also helps to shield you from personal liability if your business hits a bump in the road. Another advantage of registering your business is that it opens the opportunity to set up lines of credit in the name of your business, but more on that later.
Pay Yourself Last
A common mistake many small business owners make is to pay themselves first. I am here to tell you that this approach puts the cart in front of the horse. Instead, you need to set up an emergency fund, then pay your employees, and then your suppliers. If you are fortunate enough to have any money left over, then it is time to take a salary or dividends out of your company.
During lean times, you are the one who will get cut first. While this hurts, it is the way it should be. After all, you are the one taking the risk, not your employees or your suppliers. So, get yourself into the habit of paying yourself last, this will ensure your business has enough money and will keep you from using your personal credit to keep the business afloat.
Establish an Emergency Fund
The goal of any business is to make sure that it is profitable and sustainable. One of the first steps to achieving this is to make sure you have enough cash on hand to meet the changing needs of your business. You should set up an emergency fund from day one. This is what you need to collect first. These funds should be kept in a separate account and you should set clear guidelines when you can access them as the money is there to make sure you have the financial freedom to react to emergencies as they occur.
Establish a Line of Credit
If you are trying to run a business on cash alone, then you know how difficult it can be to manage your cash flow. Even in a restaurant, you need to buy supplies today for sale tomorrow. Paying cash for these supplies will only help you to dig a hole which you can never get out of.
As such, you need to consider alternative forms of funding, these can include credit cards, venture capital, crowd funding, private mortgages or a line of credit for your business. While they can all give you some financial backup to cash, none have the flexibility and terms of a line of credit, which allows you to borrow some or all of your approved amount and pay it back right away as you can without penalty.
There are lots of places that offer these lines of credit, however, banks are probably not the answer. Due to a variety of reasons, including excessive regulations, bad or no credit and the need for collateral, 80% of small business loan applications are turned down by banks. Instead, you need to work with a lender who specializes in loans and credit lines for small businesses.
Even if your company is incorporated and you have an emergency fund as well as access to a line of credit, a catastrophe could come and knock you off your feet. Just ask the thousands of small business owners who were wiped out by hurricanes Katrina or Sandy. Some of these businesses were profitable and well-run, but they lacked the coverage needed to survive a natural disaster.
I realize insurance is an added expense, but having the right amount of coverage is well worth it. This way you can insure your equipment, your inventory, even your facility against loss. Here is a great article from Forbes which outlines the types of insurance every small business owner should have.
Set up a Personal Retirement Plan
Your business is your retirement plan, at least this is the case for most small business owners. However, you should not fall into this trap or you will end up working for your business for the rest of your life. Instead, sit down with a financial advisor and set up a personal retirement plan. You will be glad you did and it will help you to ensure that your business does not ruin your personal finances.