Startups need many things, but the most important might be a financial plan. A thoughtful financial management strategy is key for sustaining cash flow, using business credit wisely and protecting against economic downturns.
Even with a solid financial plan, however, it's easy to let poor personal habits spill over into your business. But instead of just impacting your personal finances, this behavior can put your professional future in jeopardy. Worse, it can put your team members' livelihoods at risk. Which personal financial habits should you be sure to break before putting on your CFO hat? The following five are especially dangerous:
1. Impulse Buying
People make purchases on the fly because the “I want it now!" voice in their brain gets the better of them. One my mentors has told me consistently to always run a major purchase by a trusted source. He said that as a younger entrepreneur he would make a major splurge for the business during a great month—only to regret it when numbers went down the next month. No matter how successful an entrepreneur thinks they are, every dollar should count, every time.
To avoid buying on impulse for your business, institute a “two minute" rule. If you feel tempted, give yourself 120 seconds to think through the pros and cons of splurging on that gadget or service. If you have a business advisor, mentor or co-founder, run the purchase past them for another opinion.
2. Overusing Credit Cards
Credit cards may feel like free money, but that illusion won't last. If your revenue streams were to dry up, even the minimum monthly payments on a five-figure balance could put your company at serious financial risk.
Just as in the personal finance world, business credit cards come with interest rates. Consider limiting yourself to one or two business credit cards, and only use them for purchases you know you can pay off over the next payment cycle. If you need additional credit and have a plan to pay it off, consider an installment loan.
3. Making Late Payments
You might assume that a late payment here and there isn't a big deal. But fees build up quickly, and repeat incidents can result in a reduced credit limit. Worse, your personal and business credit scores are likely to be impacted, reducing your ability to get credit in the future.
Rather than relying on your memory, set up automatic bill pay. Set calendar reminders for expenses that you can't schedule. If inadequate cash flow is the core issue, re-evaluate your revenue and expense tracking processes. If need be, reduce your monthly spending.
4. Not Comparing Actual and Budgeted Expenses
Most businesses have a budget, but an alarming number of entrepreneurs fail to actually compare their spending to those benchmarks. Many scrape the bottom of their bank account before ever realizing they're overspending. Just as dangerously, others treat their bank statements, which are just withdrawal and deposit listings, as ad-hoc budgets.
Automated budgeting tools can suggest limits for spend categories based on your income and past expenses. If you use one, set up alerts to warn you when you get close to the limit. If you persistently struggle to align your budgeted and real-world expenses, enlist a financial planner. Small Business Development Centers, backed by the U.S. Small Business Administration, offer free or low-cost planning services.
5. Operating Paycheck to Paycheck
Your company might be able to spend everything it makes for a month or two, but unexpected expenses happen. Sooner or later, you're going to find yourself coming up short.
Before that happens, set up a business savings account. Just as you should in your personal life, save up three to six months' worth of operating expenses in case of a downturn. Resist the temptation to invest the money, which can result in loss. If you're struggling to save but have plenty of business, consider raising your rates.
You might assume that a late payment here and there isn't a big deal. But fees build up quickly, and repeat incidents can result in a reduced credit limit.
Money may not be the root of happiness, but there's nothing more stressful than running a company in the red. If you can't kick bad financial habits entirely, at least quarantine them. You'll feel better, and you'll have a stronger business to boot.
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