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So you want to start a business. You’ve probably thought out your idea thoroughly, and you might even have a business plan drafted. You’ve likely spent the last several weeks, or months, or even years thinking about the ins and outs of running your business, including all the expenses you’re going to face, the revenue you could potentially generate, and of course, what kind of profit you could turn. But why is it important that you prepare your personal finances for business ownership?
One of the most significant factors for the success of a business is the financial model on which it is built. However, the finances of your business are not the only financial angle to consider if you are ready to become an entrepreneur. So many business owners look too far ahead, neglecting their own personal finances and end up losing out because of it.
How, then, are your personal finances so important to the success of your business?
Why is it important?
Businesses rarely generate a consistent revenue stream, particularly at the beginning. It could be a long time before you make a profit, which makes paying yourself a salary challenging, if not impossible. This uncertainty makes life even harder for those who are not in a stable financial position – and could force them to make even more personal sacrifices.
Businesses are costly. You are going to need to spend lots of money every month. If your business needs immediate cash and the resources of your company cannot handle it, it can be helpful to dip into your own personal stockpile. This way, you won’t have to open any new lines of credit and get yourself into debt.
While the worlds of personal and company finances are in many respects very different, they also share many parallels. They need thorough planning, diligent budgeting, continuous management and adaption in order to succeed. You will become a better business manager if you invest time in getting a handle of your personal finances. In contrast, you will have trouble dealing with corporate finance if you have never spent time acquainting yourself with the basic elements of personal financial management. Rusty Tweed has plenty of information to help you get on top of it.
As an entrepreneur, your personal credit score can also affect your success. First of all, when determining whether credit should be extended (especially in the beginning when your business has no financial history of its own), banks will look at your personal credit rating. If they see a problematic financial background, they may be less likely to increase funding to your business as they will be questioning your skills as a fiscally responsible owner.
No matter how optimistic you are about the future of your business, and how likely it is to be profitable, the failure rate of new businesses is high. If it doesn’t quite go to plan, you will be out of a job and have no income. As well as that, you may have debts from the business to deal with. The better prepared that you are going into the business, the better prepared you will be to handle this scenario should it arise.