In a startup, money is tight.
It can take a year or longer to be profitable, and even then almost every cent you make goes right back into growing the business. To keep a new business afloat and make sure all personal needs are met, successful entrepreneurs need to be financially savvy.
Financial management is crucial to the work of any entrepreneur. But many entrepreneurs just starting out don’t have booking and accounting training or experience. Eventually, they will hire someone to take on these duties, but until then, the business finances are on their shoulders.
Accurately managing a business’s finances is key to helping it grow and avoiding costly mistakes.
If you want to become successful in entrepreneurship, it will pay off in the long run to develop key personal finance habits.
To help your small business grow, adapt the following 12 tried-and-true personal finance habits.
1) Understand the difference between profit and revenue
Ok, so this first one isn’t actually an ongoing habit per se, but it is a key mindset and concept that needs to be mastered as part of managing a startup’s finances. A dollar of revenue does not equal a dollar of profit.
When someone buys a burrito at your restaurant or a sweatshirt from your online shop, the money that comes from those purchases is revenue.
Revenue represents the money that comes back to your business—but often, this money needs to help cover overhead costs, such as the ingredients for the burrito or into the supply chain that produces the sweatshirt, not to mention paying any rent or web hosting fees.
Profit is what money is left over from the revenue after overhead costs are covered. This is the money that you can either pocket or invest back into your business to help it grow.
A common mistake new entrepreneurs make is not knowing the difference between profit and revenue. Once you master this concept, you’re on your way to smartly manage your startup’s finances.
2) Maintain a budget
Making and keeping a budget are key personal finance habits—and are also key to successful business finance management.
At the beginning of each month..
Sit down to make a budget that outlines how much revenue you estimate will come in, and how much you will need to pay in expenses.
Review this budget at the end of the month, make adjustments, and start again. Try to eliminate or cut any unnecessary spending without short-changing your customers. As you practice budgeting, you’ll start getting the hang of it and will be better able to make more informed business decisions.
3) Set aside money for taxes
When you are your own boss, there’s no one automatically setting aside a chunk of your earnings for the government.
This means you need to do it yourself. Set aside the money for taxes monthly or quarterly, or you’ll be hit hard come April. A common rule of thumb is to assume that 30 cents of every dollar you earn goes to the government.
4) Pay off debts
Short-term debt can be a healthy investment for your business, giving you the financial resources to start strong when money is tight.
But don’t take on more debt than you need and can afford, and make it a habit to make consistent payments toward your debts.
5) Take a salary
Set aside some money for yourself.
Do this by withdrawing a predetermined amount at regular intervals. When finances are tight and your business is getting by on a shoestring budget this might seem extravagant, but it’s one of those personal finance habits that will help you separate business and personal money.
It will help you support your family, and avoid the temptation to dip into the business account for personal expenses. Keep your “salary” a reasonable amount that your business can afford, and plan to grow it as profit increases.
6) Separate business and personal accounts
This is another key strategy for separating personal and business money. Set up a bank account just for business expenses and revenue.
Don’t use this money for any personal expenses, other than withdrawing a predetermined monthly or twice-monthly salary.
Keeping your money separate will make it easier to keep track of your business finances and keep up good personal finance habits.
7) Build a network
Building relationships with suppliers and other business owners is an important practice not just for getting your name out there and building a good reputation in the community, but it can also help financially.
Your connections may be able to give you, or help you find, good deals. At the same time, offer great deals to others—it might not be financially profitable now, but good connections and relationships will pay off in the long run.
8) Spend frugally
A successful startup’s office may be filled with trendy furniture, snacks, and other amenities now, but you can bet it didn’t start out that way. Smart entrepreneurs spend carefully and only when necessary.
Avoid luxury and focus only on necessity. You might outfit your first basement office with chairs and furniture you already have or can find at the thrift store, or go for the budget brand laptop. Pass the savings on to your customers, and you can always upgrade as your business grows.
9) Stay organized
The most successful entrepreneurs stay on top of their business finances by keeping organized. Keep records of every company transaction, including receipts, invoices, bills, and other records of both payments and expenditures.
If your business is just starting out and only has a few transactions each month, you’ll be fine with a filing system. As you grow, you’ll need to look into an electronic filing system. Either way, keep careful track of—and records of—everything that goes into and out of your business.
10) Use accounting software
No matter how good you are at math, you’re bound to make some mistakes here and there. Avoid that by using accounting software, which will also help you organize your transaction records.
A good software program will help you track invoices and expenses, file taxes, and, and create financial documents. There are a lot of options out there on the market with a variety of bells and whistles, so do some research to find a software that has all the features to meet your needs.
11) Use tax deductions
As a small business owner, there are a number of tax write-offs and deductions that will reduce how much you pay the government each year. Keep hold of as much of your money as possible.
Consider hiring a tax professional to consult with you and help you figure out what kinds of deductions you qualify for and how to claim them.
12) Maintain Good Personal Finance Habits
In the early years of your journey as an entrepreneur, you’ll face many challenges. One of them is supporting yourself and your family on a small paycheck.
Some entrepreneurs quit their day jobs to pursue their small business full time, and others work on their business as a side hustle. Either way, chances are you won’t make a ton of money right out of the gate. So it is important to maintain great personal finance habits.
Frugality is important.
While you’re building a business, you’re going to work long hours with little pay. Some entrepreneurs fail because they don’t have the money to afford their lifestyle while dealing with a significant pay cut. So be frugal in your personal life as well: shop sales and second hand, and keep a careful budget.
Adopt these business and personal finance habits, and you’re on your way to success as an entrepreneur.
Consult an accountant, bookkeeper, lawyer, or tax professional if you get stuck, but ultimately, your small business’s finances are up to you. Great finance habits will see you through from the early days of starting a business and beyond.