You’ve heard that it takes money to make money, but that’s only part of the story. Even a big bank account or a significant investment won’t ensure your company’s success. The truth is that you have to manage your finances — both business and personal — effectively if you want to make it.
It’s not uncommon for those who do very well with their personal finances to struggle to manage the money for their business. At the same time, someone with poor credit can still be an excellent entrepreneur and business owner.
The key is to know how to balance income and expenses, and to avoid wasteful spending. Here are some tips that can help, whether you’re starting a business or are a seasoned entrepreneur.
Understanding Business Credit vs. Personal Credit
When you first begin your business, your personal credit will be the primary factor that banks consider when looking at loans. Over time, however, your business can develop its own credit rating.
What Affects Personal Credit?
Your personal credit score gives lenders an idea of how likely you are to be able to pay back debt in a timely manner.
Lenders look at how well you have handled your bills in the past and how much credit you are currently using. Factors such as how long your credit history is, your credit utilization, and whether you have late reported payments make a big difference.
Your personal credit impacts a lot of your life. It can be reviewed for everything from a new mortgage to a rental lease to getting insurance. If you’re curious about what factors are impacting your credit now, you can order a free credit report from the major credit bureaus. Check to ensure there aren’t errors and see what red flags might be on your report.
When you first start your company, your personal credit will be the only basis lenders have to judge your creditworthiness. As a result, good credit makes it much easier to get financing for your business.
What Is Business Credit?
Just like a personal credit score, your business credit rating tells lenders how likely your company is to repay its debt in a timely manner.
A business score ranges from 0 to 100, and the calculation method varies. Business credit reports and scores only include the accounts under your business name, not personal credit accounts. Business credit reports are not free, but you can pay to order one from the three bureaus that offer them: Dun & Bradstreet, Equifax, and Experian.
Building a specific business credit rating can help you access funding, build credibility with banks, and even qualify for lower rates on business insurance. It also helps keep your business and personal finances separate, making tracking easier for financial reports and taxes.
Small Business Budgeting
Owning a small business is exciting, and there is no end to the things you can spend your money on. Unfortunately, many unscrupulous marketers will encourage you to “invest” in things that don’t help your company at all.
To make wise financial decisions, you need a budget for your company. Your budget functions both as a record of where your money is going and as a map for your financial goals. You’ll be able to see where you can cut spending and where you might want to invest more.
Most importantly, if you need funding in the future, your budget can help you apply for a loan or pitch investors.
How to Create a Budget
A business budget isn’t quite the same as a personal one, so it’s hard to start from scratch. That’s where a budget template can come in handy. A template makes it easy to know what information you need and how you’re doing.
The first step is determining your income. With a typical job, you have a set income every two weeks, but owning a business is very different. You’ll need to determine how much money you’re bringing in each month and where the money is coming from — sales of products, customer subscriptions, services you offer, and more.
Next, determine your business expenses. It may be easier to divide them into categories. Fixed expenses include rent, utilities, insurance, and salaries. Variable expenses may consist of marketing efforts, travel expenses, cost of goods sold, taxes, and more.
Your income minus expenses is your expected profit. With that profit, you might reinvest in your company through one-time purchases, or you might decide to set it aside as cash on hand.
If your expected profit is negative, your business is losing money. It’s time to cut expenses and boost income.
Planning a Financial Future
Once you have a snapshot of your current situation, use your budget to build for the future. For example, you might create a forecast of expected profits over several months and create a plan for what to do with the surplus.
You can also create a wishlist of purchases for your business. This can be anything from a major piece of equipment to a bonus for employees if they hit a specific target. Then, use your budget to make financial decisions that move you toward achieving those goals.
Update your budget regularly with actual numbers and compare them to your projections. If you’re missing the mark, you might need to adjust your expectations, increase sales, or find a way to reduce expenses.
Great Financial Habits Can Help You Succeed
Developing the habits you need to stay profitable, both in your personal budgeting and your business can make life much easier. Your business will grow effectively, and you’ll have a lot less stress.
Understanding personal and business credit scores will help you when you need to apply for funding. Having a strong credit rating will help you get approved more easily, and you’ll be able to grow your business quickly.
However, it’s essential to make wise financial investments. There are a lot of ways to waste money as a business owner. Having a budget can help you plan your income and expenses so you don’t overspend.
With these finance tips, you’ll be laying the foundation for success in your business.