If you’ve recently started your own business, or are considering making this critical decision, there are several facts about business ownership and its effects on your personal finances that you should know. In this blog, the latest in Northwood’s series on financial milestones, we offer some financial advice to new business owners.
The Decision to Start a Business
Most people start their own businesses for very personal reasons. You may have excellent ideas for new products and services that you’d love to make succeed, or maybe you’ve realised that you’re more of a leader than a follower, with the skills and expertise to run your own enterprise and compete with the best. Whatever your reason, your decision to start your own business is the result of your passion to succeed – the trick is to make sure that you do.
Business Finances vs. Personal Finances
One major difference between the finances of a business and those of an individual is the flow of income – while a salaried person can usually rely on a fixed income each month, a self-employed person or business owner must learn to cope with revenues that rise and fall depending on seasonal changes, economic conditions, and other factors.
When you start running your business, try to keep your monthly expenses as low as possible, so that a surplus can be created to carry you through the slower months. During this time, you may also need to keep your personal expenses down – don’t be tempted to treat the company’s money as your own.
Budgeting For a New Business
If you’re concerned about your personal cash flow situation during the first year of your company’s existence, you may want to budget for this period by following these hints:
- Save up before you start – By creating a personal lump sum that you can use for living expenses that is separate from the capital you inject into your business, you’ll be able to maintain your quality of life during the first year after you start your business.
- Keep costs low and profits high – Try to accumulate as much as possible by allowing your business to grow and by re-investing your profits for the first while. Once your business is trading with a stable client base and is showing a healthy profit, you’ll be able to reap the rewards of your hard work and careful planning
- Take good advice – Never underestimate the value of excellent financial advice from day one. Your financial advisor will be able to guide you through the first year or two as a business owner, offering you solutions to common problems encountered by all entrepreneurs.