How You Manage Money Should Change When You Start a Business

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.

About Sarah Johnson

Sarah Johnson is a business writer and editorial consultant. Her work has appeared in CFO and CIO magazines.
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2 comments
Alexbiz20
Alexbiz20

Great advice! It's so important to know that debt is part of a new business and borrowing money might be vital to your company's growth.

usamen24
usamen24

A lot of companies have a big lag between when they put out the money and when they can gather, notices Lady Heistein - creator and handling associate for profit-wise bookkeeping. The managing money for a small or huge business is so important for all business person.  Thanks to share the valuable tips of managing money on business. http://instalhsot.com

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  1. [...] One thing that many first-time business owners may not realize is the difference between managing money at home vs. at your company. As one writer explains, in many ways the two are very similar but certain aspects should be “worlds apart.” In this small business advice post, Sarah Johnson shares four common assumptions that future owners need to change -€œ from a negative perception of debt to assuming a business income spike means it’s ok to spend. Read more here… SOURCE [...]

  2. [...] instance, debt isn't a bad word, Intuit explained. Individuals should try to avoid high credit card bills and massive loans, but [...]

  3. [...] avoiding debt is extremely important. But, this idea could change for a new venture. For example, borrowing is a key way to grow, and opening business credit cards can help get the startup off the ground. However, the minimum [...]