Tips From FreedomPlus On Managing Personal Finances While Running A Business
Business Cash Is Not Your Cash
As the owner of a business, itâ€™s important to treat income from your business as if it were from an employer. In other words, business income doesnâ€™t flow straight into your personal bank account. Many business owners get into trouble when they treat their business like an ATM.
Instead, take a salary from your business each month just like you would if you were still an employee. FreedomPlus mentions that to determine your salary, use the amount you were making at your previous job, assuming your self employed tasks are the same. If your tasks are different, use the market rate for those tasks. You can find market rates at sites like glassdoor.com and salary.com.
Another advantage to taking a monthly salary is that it will keep your personal income and spending separate from your business income and spending. Your business should have its own checking account that business income is deposited into. Your salary will go into a separate personal checking account. This separation of funds prevents what is called commingling of funds.
FreedomPlus points out that when personal and business funds are mixed together, it can throw up a red flag from the IRS.
Manage Personal Spending
Having separate checking accounts for personal and business funds is a great step in successful financial management of your personal and business finances. But it isnâ€™t enough.
FreedomPlus notes that it is common for business owners to begin charging many of their personal expenses as business expenses. This starts down the road of unmanageable debt. You figure the business can basically pay for everything. In reality, the business can only pay for what it can afford and that actually qualifies as a business expense.
You still need to live within a budget when it comes to personal and business spending. In other words, your personal expenses canâ€™t exceed your monthly salary. It also means the business canâ€™t spend more than what is left over after youâ€™ve taken a salary. Otherwise, youâ€™ll find the business quickly sinking from too much charge card debt.
Establishing Emergency Funds For You And Your Business
An emergency fund is a corner stone of good personal financial management. Setting aside at least $1000 is a great start. 3 months is even better and from there 6 months. This means taking a small amount out of your salary each month and putting it toward your personal emergency fund.
FreedomPlus points out that a business emergency fund is different from a personal emergency fund. Think of yourself as an employee of the business. If you lose your job, you have no income. Itâ€™s important for your personal emergency fund to cover income for X months (i.e., 3 – 6 months).
For a business emergency fund, it is unlikely that well diversified, business income will all of the sudden drop to zero. Even in bad times, the business will continue to bring in a small amount of income. Knowing the business will continue bringing in some base amount of income each month means its emergency fund can be less than its monthly income.
If you are finding yourself overwhelmed by debt, FreedomPlus can help with personalized loans. You can find them at FreedomPlus.com.