Compared to other workers, entrepreneurs tend to enjoy an advantage in financial literacy. The know-how required to invest, organize, and save funds for a business often applies well to personal finance management, so these individuals run a “tighter ship” at home.
But this isn’t always the case. Business owners can lose their way financially by going to one of two extremes: Tying their personal finances too closely to their business resources, or running their personal finances quite differently from how they manage company money.
An unbalanced approach in either direction can lead to financial difficulties in the form of squeezed budgets and damaged credit. On the other hand, entrepreneurs who can strike a middle ground between these extremes enjoy greater financial security and success in their business and personal lives.
How successful entrepreneurs balance personal with business finances
For owners of small businesses, personal and business funds are often interconnected. Most entrepreneurs use their own money to fund their enterprises, and when they make profits off their goods or services, a portion of the proceeds goes toward paying their living expenses.
But business owners don’t always recognize how they could benefit if they managed their personal finances the same way they run their companies.
“Entrepreneurs understand the importance of managing their businesses effectively for the greatest success. Unfortunately, some of them do not apply the same tactics to their personal finances, which can create problems that might eventually spill over into the business. It’s crucial for business owners keep their personal finances in good shape, just as they do for their business,” according to Natalie Cooper, editor at Banking Sense.
Applying business techniques to a personal budget includes both minor and dramatic tactics, such as:
- Setting small goals. The greatest financial gains often come from small behaviors that individuals maintain over a long period of time, such as packing lunches, clipping coupons, and purchasing used items rather than new ones. Although the benefits don’t appear immediately, they create greater financial stability over the long run.
- Considering cost effectiveness. Successful business owners use cost-benefit analyses to weigh financial decisions before they make them, but they may not think to use the same technique in their personal lives. You should avoid projects and purchases that cost more than the expected benefits.
- Making big changes. “Downsizing” can be a dirty word in the business world, but it can certainly furnish dramatic financial benefits in a crisis. Reducing spending by moving into a smaller home or trading in a pricey car for a more economical one makes more money available to save or spend on more essential expenses.
Navigating personal credit from a business perspective
For business owners, maintaining strong credit scores becomes a way to achieve their personal and business goals. When negative payment histories, outstanding judgments, and overextended credit lines reduce an individual’s creditworthiness, that impairs your ability to obtain financing for housing, transportation, and business investments.
Once your credit score takes a hit, it can take months – even years – to repair the damage. The best way to avoid credit problems is to make sure you never take on more debt than you can handle.