When you’re in the early throws of your life as a business owner, it can be very tempting to use personal savings to launch and support operations. Even if you’ve been in the game for a while, using your personal money to cover a significant purchase or keep things going when cash flow turns into a trickle can be very tempting and easy to do.
If you contemplate this approach, you wouldn’t be alone. Many small business owners often tap into their own savings accounts to keep their businesses afloat or help them achieve their business goals.
However, a word of warning: Small business entrepreneurs must exercise extreme caution when mixing their personal and professional finances.
If you’re contemplating making use of your personal savings to cover a shortfall in your business finances, there are many risks you should be aware of. Here are some steps you should take before loaning your business money from your personal account.
1. Determine risk
Before launching a new firm, business owners who must rely on their own personal savings are generally advised to assess the risk versus the expected return. Before injecting personal funds to make up a corporate shortage, these risks should be fully evaluated and taken into account.
The best approach is to conduct a risk analysis. Determine the benefits and returns from the savings you have made. Plan out a few different scenarios and take into account as many elements as you can. Conduct “what-if?” analyses with various results; this will help you to better understand the sizable element of uncertainty with new endeavours.
It could even be worthwhile to collaborate with a business partner.
If at all possible, attempt to split the risk, possibly with a business partner in a comparable circumstance. In order to make your offering stand out, ask around to discover if people might be interested in your product or service, then establish and create your point of distinction.
A very important aspect of managing financial risk involves putting the correct insurance in place. Arranging insurance, such as public liability insurance or small business insurance, can help to ensure your finances are protected if things don’t quite go according to your plans.
2. Think about your alternatives and make preparations
When it comes to early-stage business planning, the old adage is true: If you fail to plan, you plan to fail.
As such, you should think in terms of size and take into account as many planning tactics as you can. You don’t plant a tree; you plant a seed. Make your plans in accordance with the business’s growth cycle.
Of course, you want your business to be a success, and if you have the means to aid that success, you’re likely to leverage them. However, you should consider if you should depend on personal funds at all or even at this early point.
For more established enterprises requiring a cash infusion to support an acquisition or new project, the same advice is applicable.
Before increasing your equity, consider all your possibilities. What is stated in your business plan? Describe your budget in detail. Will you be taking out a loan if you need to put in extra money? If so, make adjustments to your cash flow projections so you can predict when you will get it.
Be sure to give each of these things some thought before contributing any of your own money.
3. Maintain your accounts
Have different bank personal and business bank accounts. It is also beneficial to open a bank account and designate it as your tax account before opening a different account for your business.
Pay taxes on one out of every three dollars you make from sales and don’t touch this money.
So, whether your firm is new or established, ensure you engage in the following processes:
- Determine the risks involved and the value of any potential rewards.
- Think about working with a partner to ease the load.
- Plan repayments.
- Keep your personal and corporate finances separate and maintain a separate account for tax.
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