National Small Business Week (April 28 – May 4, 2024) celebrates mom-and-pop shops, start-ups, and the entrepreneurs who create them. We know that business owners have enough to worry about without their personal finances being one of them. Here are 5 tips for better money management as a small business owner.
1. Keep business and personal finances separate
A good general rule of thumb for small business owners is to avoid business transactions from spilling into the personal, and vice versa. Mixing the two can lead to cash flow, debt, and tax issues and put personal assets at risk of being used to cover your company’s financial liabilities.Avoid this headache by having separate bank accounts and credit cards to make it easier to maintain distinct financial records.
2. Build your business credit
You’ll need to submit an application on your business’ behalf if you ever need external funding. And just like applying for credit as an individual, having good credit matters for businesses too. Getting a business credit card is a good place to start — but keep in mind you’ll likely need a D-U-N-S or EIN number in order to apply which can take up to a month.
Because it takes time getting the credentials to open new business credit and for those transactions or payments to build up your score, it’s recommended to start establishing your business’ credit well before you need to borrow money. Otherwise, you might have to resort to taking out loans in your own name which puts your personal credit score at risk.
3. Give yourself an income
It’s common for small business owners, especially in the first few years, to put all their money into their business and fail to pay themselves a salary. While it’s certainly important to invest in your business, neglecting yourself financially heightens the likelihood of mixing work and personal finances. In lieu of taking a salary, some business owners pay for their personal expenses out of their business account, where things can get messy quickly.
4. Plan for retirement
When trying to grow a small business, you’re likely preoccupied with day-to-day concerns like managing cash flow and retirement is probably the last thing on your mind. But neglecting to think about your financial future can be a critical mistake, especially in the face of rapid inflation. Simplified Employee Pension IRAs or Solo 401(k)s are straightforward options for business owners operating on their own (and have no employees). Small businesses with 20 or fewer employees may find SEP-IRAs a convenient retirement option.
5. Include your business in estate planning
Making financial plans for your future should also include what would happen to your business if you were to pass away. Your business has assets and debts that need to be managed just as your personal affairs do – some that you may or may not want your surviving loved ones to deal with. Do you want the business to be sold or passed on to someone else? Who will have the power of attorney to make decisions and pay bills in your absence? What should be done with the businesses assets? These can have financial implications for surviving family members and result in a big hassle.
Running a small operation is a big undertaking. If you’ve ended up damaging your personal finances in pursuit of growing your small businesses, a KOFE coach may be able to help you get back on track. Contact us today for this free and confidential service.