Multiple independent functions need to be taken care of simultaneously for any business to operate smoothly. Planning, organizing, financing, marketing, staffing and implementing changes are all important facets of running an organization. Finance plays a key role for any business, especially for small business owners who generally tend to have stronger control over it. Many a time, small business owners have to manage their business and personal finances simultaneously.
At times, there is a huge gap between business and personal priorities and bridging the two becomes a tricky task.
As a sole proprietor, you cannot afford to overlook your personal finances as they have an impact on your business. It is equally important to keep track of your finances as this helps to optimize the flow of money. Listed below are some tips that will help you to manage your personal finances:
Diversify your investments
‘Do not put all of your eggs in one basket.’ This is particularly true when dealing with investments.
This mantra can be used as a general rule of thumb for all businesses but small business owners need to be extra careful about their finances and diversify their investments. Diversification is considered to be the main crux of investment.
Small business owners in particular are more inclined to reinvest their entire personal capital back into their business. Obviously, investing in your business will help you to expand but putting the entire sum in one pot can be risky.
It has been observed that approximately 50% of all small enterprises stay financially relevant only for five years.
Sole proprietors can instead invest their funds in other businesses or a side business. They can also open a savings account and save a significant amount in it or opt for alternative investments. This way, you avoid putting all your money in one place.
By diversifying, you also ensure that your world does not come to a standstill, just because one source of your capital has been hit hard, as you have other income-generating sources to rely on.
Plan for your retirement fund
Most personal finance advisors swear by the importance of setting up a retirement fund.
By setting up a retirement fund, you put yourself on the path to financial security and independence in the future.
You do not necessarily have to invest a major part of your earnings in one go but a specific amount each month can provide you with tax benefits and ensure that you have a sizeable pot of money available come retirement time.
The retirement plan you choose should also take into account the nature of your business and your current lifestyle.
It is important to consult a reliable company for your retirement funds. Take the recent PPI scandal as an example. Many well-known financial institutions have been implicated in the PPI scandal leading to billions of pounds worth of PPI refunds. Thus, carry out a background check of the institution before you receive the final paperwork.
Plan for an emergency fund
You may not meet your sales deadlines every quarter. In such situations, an emergency fund can come in handy to keep your business’s cash flow running smoothly.
If you have a seasonal business then it is crucial to protect yourself from the lean months by having emergency funds in place. Regardless of the current financial position of your business, it is always important to anticipate potential business risks that could hamper your cash flow and equip yourself with a sizeable emergency pot.
Separate business expenses from personal
Initially, it might be difficult for you to segregate your personal expenses from business expenses but doing this will take you one step closer to a secure financial future. Your business and personal life might be inter-linked but keep the finances separate.
The hallmark of a successful entrepreneur is in their ability to keep their finances separate and secured. Following are some benefits of keeping your personal and business expenses separate:
o You do not have to go through extreme stress during tax season
o Your business’s financial woes do not impact your personal finance
o You do not face personal liability if something goes wrong with your business
One way to ensure this is by opening a separate account for your business and applying for a business credit card to handle all your business-related expenses.
Stick to your budget and manage your expenses
Set a specific budget before you start spending any money. This will help you to control day-to-day expenses and set your priorities. But, you need to be careful and flexible when doing so, especially if you feel that the budgetary constraints that you have imposed is hampering your growth.
Track your monthly expenses and thereupon prepare a budget.
Keep a constant check on the interest rates
Observation is an important factor in the world of business. If you are a hands-on entrepreneur you may be aware about interest rates that is charged on any finance that you avail. If you notice that your current financial status does not allow you to accept a particular loan then its better to decline such offers.
If you have any loans to pay off, select an optimal payment option, one that does not affect your current finances significantly.
The same is applicable for credit card payments. This will enable you to pay off your personal and business debts smartly.
Build and trace your credit score
Supervising your credit score is essential for your personal as well as business finances. Your personal credit score has an impact on your business finances. Sometimes, financial institutions trace your personal credit score before associating with you.
Wondering why your personal credit score has an impact on your business?
A huge corporation would have several responsible employees like a CEO, co-founder, etc. working for the firm. On the other hand, a small firm has limited working staff and lacks stability.
Besides, a small business has a lesser ability to pay off debts quickly. This is why all financial institutions check your personal credit score as it gives them an insight about how you manage your personal debts and finances.
Good borrowing behavior and credit accounts help you to build a good and trust-worthy image which eventually strengthens your business image.
Lastly, as a sole proprietor you may have to put additional efforts as you are solely responsible for looking after aspects of your business. But being smart with finance right from your initial days will work for you in the future.