In some ways, managing your business’s money is similar to managing your personal finances: You should practice disciplined spending, pay your bills on time, and regularly balance your books. In other ways, however, the two tasks should be worlds apart. Here are four common assumptions you may be making at home that you need to change when you start a company.
1. You think managing money is easy. When you work full-time for someone else, your finances tend to be pretty straightforward: A salary comes in on a regular basis, money goes out once a month to pay various bills, and taxes get paid once a year. When you run a small business, money comes in and has to go out on a less predictable basis — and you have to pay taxes more often. “A lot of businesses have a big lag between when they put out the cash and when they can collect,” notes Dave Heistein, founder and managing partner for Profitwise Accounting. Yet cash is “king” in the business world. Small-business owners often make the mistake of paying more attention to their profit and loss statement than their cash flow, Heistein says.
2. You believe “debt” is a bad word. Whether you have a ballooning credit card balance or a high-interest car loan, paying down debt should be a priority in your home life, many personal finance experts assert. But in business, especially when you are just starting out or expanding, borrowing may be necessary and helpful. However, you should always pay your minimum balance on credit lines and business credit cards.
3. You assume you can spend sudden windfalls. Before you owned a business, you may have used an unexpected bonus for a shopping spree. Now if you have a sudden burst of sales — making your business income temporarily spike — you may want to resist the temptation to spend it. Small-business owners need a cash cushion, enough to cover at least three to six months’ worth of expenses, says Mindy Crary, a financial coach and owner of Creative Money. “Even if you have a fantastic month, you shouldn’t spend that [money] until you see what your income trend is,” she says. Accounting software tools, such as QuickBooks, can help small-business owners get a handle on the average income their business is earning over time.
4. You think stocking up will result in savings. The super-saver mentality you use at home — snatching up sale items at the grocery store and filling your pantry with discounted staples — is unlikely to benefit your business. Instead, you risk losing money if the items you purchase don’t help to generate sales. “When they’re first starting out, most businesses tend to over-purchase inventory,” Heistein says. Entrepreneurs who are enamored with their concepts may hoard materials under the false assumption of “if you build it, they will come,” he adds.