If you're in the midst of starting up a new business, congratulations. While incredibly challenging, this adventure into the startup world is an amazingly rewarding experience. It’s exciting to see a business grow, but when you feel your financial situation being stretched beyond its limits, things can get a little more stressful than enjoyable.
The following tips will help you to succeed as an entrepreneur, by allowing you to get your personal finances in order.
Avoid Excessive Credit Card Debt
It's inevitable that you are going to put some of your personal income and savings towards your growing business each month. As a result, you may be tempted to rely on your credit cards for monthly living expenses, or to use credit cards to fund your business. You may have even heard stories of startups becoming extremely successful after the founders used credit cards to get things started. Airbnb got their start maxing out multiple credit cards, and the resorting to selling cereal to get their business off of the ground.
In spite of that high profile success story, this is a bad idea, mostly because the interest rates are too high, sometimes surpassing 15 percent. You will be left liable for the debt regardless of whether or not the business succeeds. Finally, you risk being rejected for credit later on if you have overextended yourself.
Add a Buffer to Your Monthly Budget
If there’s one financial term all entrepreneurs should remember, it's burn rate. According to Investopedia, burn rate is the rate at which your business burns more money than it makes. This isn’t necessarily a bad thing. It takes time for a business to become profitable, and it must be fed so it can grow. Chances are, your personal budget is going to take a similar hit.
Whether it’s your personal or business finances, you don’t want to underestimate your burn rate. So, if you think that your personal burn rate is going to be $800 dollars each month, plan on $1000 dollars. A 20 percent buffer can help a lot to plan for the worst.
Get Yourself Up to Speed on Financial Management
This is no time for financial mistakes when it comes to running a business. If there are things that you don’t know about personal financial management, it is time to get yourself up to speed. You need to learn about taxes, investments, savings plans, creating a budget, and tracking your expenses.
This can be a struggle for millennials as they are used to being a bit hands off when it comes to financial management. After all, there are so many tools that automate this process. However, entrepreneurs cannot afford to rely on apps to get this right. They have to have a solid education in financial management.
Cut Entertainment Expenses But Don’t Eliminate Them
Tightening your budget on all fronts is extremely important. However, you will definitely want to cut entertainment expenses first. After all, this is a time for fiscal discipline.
On the other hand, don’t eliminate your entertainment budget completely. There is something to be said for keeping up morale. The truth is, people need to have fun in order to be productive and functional.
Separate And Organize Finances
Picture this: you’re at the store buying odds and ends for your house. Then, you remember that you need a few things for the office. So, why not just buy those now, and pay yourself back later?
This is not a good idea. One compelling reason is that the protections that are put into place by incorporation can disappear if you start to blend finances. By keeping things separate, you can also avoid unnecessary tax complications.