4 Reasons To Examine Your Personal Finances Before Starting A Business
When it comes to starting a business, there is a huge amount you have to think about. The vast majority of these thoughts will be geared towards the business itself, as you contemplate subjects such as finding an investor, writing your business plan, and formulating your strategy for success. While this hyperfocus on business is undeniably useful, there is another area that requires extensive examination: your personal finances.
The idea of your personal finances relating to your business may sound, initially, rather strange. However, your personal finances can have a much larger impact on your business than you might expect. To demonstrate this point, and underline the need to ensure your personal finances are on track before starting a business, below, we’ve outlined four reasons why.
The damage of distraction
The management of your personal finances is time-consuming and incredibly detailed; you have to negotiate a variety of topics, ranging from interest rates to credit scoring, and constantly checking you are living within your budget. This is difficult enough when your finances are running well, but all the more challenging if you are dealing with issues such as debt or missed payments.
Given the importance of your personal finances, it’s next-to impossible to push these matters from your mind when you’re trying to start a business. Finance impacts everything, and if yours are not in the best shape, then this will be a distraction from your business. If you’re having to field calls from creditors to constantly swap money between your accounts, you will be distracted, and your business aspirations may suffer as a result.
It is therefore well worth taking the time to examine your finances and ensure they are in good order before starting a business. You may want to tweak your existing budget, or start budgeting if you don’t do this already, and examine your options for debt consolidation to help streamline debt management. There are plenty of ways to do this; various online personal loans for bad credit are readily accessible, or you can opt to discuss your financing options with a land-based financial institution if you prefer.
2. The problems caused by over-focusing on profit
The decision to start a business is made for a wide variety of reasons, but people wanting to improve their financial outlook is one of the most popular. While this is understandable, it can lead to an over-focus on profit that may even be detrimental to the business.
If you are focused on profit above all else, then the chances are that your business endeavors are not going to be as focused as they could be. Businesses have to exist as entities in and of themselves, powered by good ideas and genuine enthusiasm. It’s always best to see improving your finances as a motivating factor, rather than the motivation entirely, for starting a business. If you are confident that your finances are at least well-managed and in order before starting your business, you’ll be empowered to make decisions that are good for the business's future rather than potentially just focused on short-term profitability.
3. The investment factor
Experts have found that the most common source of funding for a business is the entrepreneur themselves, so it naturally follows that your personal finances need to be in good order if this is the case. This is true even if you are seeking external investment; it’s helpful to know that you may have room in your personal finances to bridge any gaps between what the business needs and what your investors are able to provide.
Speaking of external investment, it is also worth noting there is a chance that some investors will want to know about your personal finances before investing in your business - this is particularly true if you are applying to a bank. Your personal finances may seem irrelevant to your business, but many investors will actually see them as crucial; after all, how you manage your own money is probably a good indication of how you will manage the business's funds. As a result, it’s helpful to ensure your financial affairs are at least well-managed and strengthened by strong budgeting and planning, just in case an investor asks for an insight prior to making you an offer.
4. The need for savings
While it is unlikely to be a subject you wish to study in too much depth, the simple reality is that businesses fail. While there is no reason to believe that your business will fail, it’s important to at least be aware of this possibility - and to ensure you have a sound financial cushion to fall back on if it happens.
The size of that financial cushion very much depends on your plans for how money will be managed in the first few months of your company’s existence.
If you are intending to continue to work in a standard job for the first few months of your business's life, you can save relatively little if you prefer, as you will still have at least some guaranteed form of income while your business gets off the ground.
If you are intending to take a salary or withdraw profits as soon as possible - and you have reason to believe that will be possible, given the business's financial projections - then your cushion can be relatively small; around three months of expenses should be sufficient.
If you are intending not to draw a wage or withdraw profits for several months, then you will likely need to save enough to pay your living expenses until you plan to draw a salary or take profits - so if you don’t intend to do this for 12 months, you’ll need to save enough to cover your living expenses for 12 months.
It is therefore useful to examine your finances and determine how you can save the required amount for your intended course of action.
As the points above demonstrate, there is a strong overlap between your personal finances and your business. It is therefore well worth taking the time to carefully comb through your personal finances and ensure they are in order before embarking on your business endeavors. This will ensure you have the freedom to engage with your business without any distractions, safe in the knowledge that your personal finances are ready to support you through the process.
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