Learning about personal finance is one of the most important steps you can take as an entrepreneur. Although grit, perseverance, and hard work are all factors in your business’ success, money knowledge is perhaps the most important skill of all. In fact, these six personal finance skills will destroy entrepreneurs if you don’t master them.
Keep reading if you want to avoid financial disaster while you build your company and create your legacy.
Budgeting and Tracking Business Expenses
It’s important to treat your business as a business from the start, even if you don’t have any clients or income yet. Form an LLC, open a business bank account, and track your expenses.
In the beginning, many entrepreneurs fail to keep business expenses separate from personal expenses. For example, they’ll use personal credit cards to pay for supplies or travel expenses.
This can quickly lead to problems, especially if your business isn’t yet profitable. Consult an accountant or ask fellow business owners about the best ways to track your income and expenses. Make sure you develop a system that’s organized and updated regularly.
Being organized, budgeting, and tracking from the beginning of your business will set you up for success and avoid accounting headaches down the road.
Creating a Financial Business Plan
Many entrepreneurs create a business plan with an emphasis on how they will market and grow their business. However, creating a business financial plan is equally as important.
Without a plan, it’s easy to get off track and make decisions that aren’t in your best interest. A financial plan will give you a roadmap to follow and help keep you accountable.
In your financial business plan, write down how much cash savings you prefer to have on hand in your business. Also, document what your ideal monthly and annual revenue goals are. Write down whether or not you’ll utilize debt, raise capital, or fund the start-up costs yourself.
Doing this will help ensure you are making decisions that align with your long-term financial goals. Once you create a financial business plan, you can always go back and edit it as things change. However, setting ground rules about your finances and being able to refer to them is a helpful way to start your entrepreneurial journey.
Understanding Your Credit Score
Another key personal finance skill entrepreneurs need to master is understanding their credit score. This number will have a big impact on your ability to get loans and lines of credit.
First, get a copy of your credit report and start monitoring it regularly. You can get a free copy of your credit report from each of the three major credit bureaus. When you pull your credit report, be sure to check it for errors.
If you find any, dispute them with the appropriate bureau right away. Having accurate information on your credit report is important in maintaining good credit.
To learn your actual score, you can use a service like Credit Sesame or Credit Karma to get a ballpark figure. There are also many apps as well as credit cards that will provide you with a score. Keep in mind, your score might vary depending on where you access it.
Ultimately your goal should be to have about a 750 or above FICO score, which will qualify you for some of the best rates.
Borrowing responsibly is another important aspect of personal finance as an entrepreneur. If you take on too much debt, it can quickly become overwhelming. Be careful about taking out loans and only do so if you are confident that you will be able to repay them.
Sometimes securing a line of credit is preferable over a loan because loans are lump sum payments whereas you can access lines of credit when you need it.
Of course, many entrepreneurs grow their businesses debt-free, but this can be challenging in many industries that require expensive equipment, leases, and staff. So, make the best choice for the type of business you want to grow, taking into consideration that you will have to make payments on any money you borrow.
Having Multiple Streams Of Income
Diversifying your income sources is a smart move for any business owner, but it’s especially important for entrepreneurs. If one stream of income dries up, you’ll still have others providing revenue to keep your business afloat.
There are a few ways to diversify. You could start by offering additional products or services that complement your main business. You could also look into freelance work or consulting gigs. Or, you could start a side hustle.
Another option to consider is collaborating with other entrepreneurs to reach more people. You can do joint products, webinars, events, and more. If you pursue that route, though, make sure you have a formal agreement about what each party will contribute.
No matter what route you choose, having multiple streams of income is a smart move for any entrepreneur. Not only can it help you weather tough times, but it can also provide additional income to help grow your business.
Investing in Your Business
Investing money back into your business is one of the best things you can do for its long-term growth. This could include hiring new employees, expanding your product line, or investing in marketing and advertising. Whatever you do, make sure you are strategic about how you are spending your money.
It’s important to have a clear idea of what you want to achieve with your investment and how it will help your business grow. Otherwise, you could end up wasting money on something that doesn’t actually benefit your company.
This is good information to include in your financial business plan. Decide what percentage of your profits you’ll utilize to put back into your company each month. That can provide a benchmark when you’re tempted to use the money for other things.
These Finance Skills Will Destroy Entrepreneurs if They Don’t Master Them
These are just a few personal finance skills that entrepreneurs need to master. If you can get a handle on your finances, you will be well on your way to success. Remember to keep learning, and don’t be afraid to ask for help when you need it. There are a lot of great resources out there when it comes to business finances, so take advantage of them and learn as much as you can.
Every entrepreneur will have a different threshold for risk, come from different backgrounds, and have varying levels of support and financial opportunities. However, regardless of where you start, being organized with money and having a clear head when making financial decisions can help your business to grow and flourish.