5 Reasons to Get Your Finances in Order Before Starting a Business

Starting a business is your first big step to financial freedom, but more money doesn’t necessarily lead to better spending habits. You’ll need to get your personal finances in order before you can potentially generate or profit from your business, especially if you plan to take out a loan to help scale up and accelerate your growth.

The path to success begins with keeping track of your income and spending and developing smart financial habits.  There are two key enablers for building healthy personal financial habits: realistic goal-setting and ruthless consistency. Breaking down your goals into achievable milestones, rewarding yourself along the way, and building up the right social support to help you stay accountable are also critical. Of course, using financial management software and reporting solutions are extremely helpful to precisely track your spending.

When you use apps like this spend tracker from SoFi, you’ll get a bird’s-eye view of your financial performance in real-time. Plus, you can set goals, track spending, and monitor your credit score with regular updates. These productivity features make it much easier to monitor your personal finances and stay on track with achieving your goals

A solid personal financial foundation is essential for your business’s success, but that may not be initially apparent to startup owners. So let’s review the 5 key reasons why you need impeccable personal finances before you launch a new business:

1. Your Personal Credit Score Matters

Startups aren’t able to take out loans or purchase property with business credit until they build it up a financial track record.  But they can’t build up business credit without utilizing their personal credit. It’s a well-known “Catch-22” of being a business owner, and something that every business owner typically has to endure when starting out. If you don’t have a high personal credit score, you’ll have no chance of getting any financial backing from the bank. Over time, your business can establish a positive credit history by paying suppliers in a timely fashion and staying up to date with your creditors. But the reality is you’ll need both strong personal and business credit history to demonstrate that you’re financially responsible and an acceptable risk for suppliers, banks and other lenders.

2. You Won’t Have Much Spare Time

When running a new business, you won’t have a lot of spare time for managing your personal finances. Cleaning up your personal matters while simultaneously building the financial backbone of your new company is like trying to change the wings on an airplane while you’re still flying!  Before you even launch your startup, engage a financial planner to do a health check on your personal finances and make sure things are stable and well organized.  Having some professional help will free you up to focus your time and energy on getting the company finances setup properly.

3. You Must be Prepared for Income and Profit Volatility

Most businesses won’t make a consistent stream of revenue within the first few months of launch. In fact, it may take two to three years before your business becomes profitable. That means you may go months, or even years, without a paycheck or regular salary. Before you commit, you need to assess how long you can last without a steady source of income. If you’re able to look at your personal financial statements and understand if you’re in a bad financial situation or have enough savings to take the plunge, you’ll be in better shape to succeed and scale long-term.

4. It Takes Money to Make Money

There’s no denying that running a business can be expensive. From big-ticket items like vehicles and manufacturing machines to small things like office supplies, there are dozens of business expenses you’ll have to pay for every month. If your business needs a sudden influx of cash, you’ll need a cushion.  It’s a good idea to get a line of credit established with your bank to help you absorb these costs over time.  It’s an even better idea if that line of credit is secured by the assets of your company and not reliant on your personal guarantee.

5. Most New Businesses Fail

According to the U.S. Bureau of Labor Statistics, 21.5% of all startups fail before year one and 30% fail in year two of operations.  Only 25% of new businesses make it to 15 years or more. Of course, no one likes to think that their business could fail, either in the first year or at some point in the future. It’s good to be optimistic when you are in the startup phase, but you need to be prepared for the worst.  Getting your financial house in order is one way to increase your likelihood of success and insulate you from some of the challenges that inevitably hinder young businesses in their early days after formation.

Bankruptcy is not something that anyone wants to go through.  But if you find yourself in that situation, you’ll be on a much better footing and stronger position if you have isolated your business credit from your personal credit.  Lenders will have a claim against your business assets, but you may be able to protect your personal assets from the bankruptcy proceedings if you have prepared in advance.  Furthermore, if you have a decent personal financial cushion before you commit to your startup full-time, you may be able to rescue it in a worse-case scenario.

The Takeaway

Starting a new business is tough!  It needs to be done using the best skills and the most thoughtful application of financial planning, budgeting and transparency. Following the tips shared in this article will help assure that you become a productive,  profitable and solvent business that isn’t just looking after its own bottom line but your customer’s as well.

To learn more about how to navigate the pitfalls of starting up a new business, sign up for the TopRight blog! If you’d like to receive more great tips like this, please follow me @TopRightPartner, connect with me on LinkedIn, or buy a copy of my latest book, Marketing, Interrupted.

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