Small business owners often fall into the trap of using their personal funds for company use and vice versa. It would be an especially tempting scenario during the pandemic if your company were caught in the outbreak without a cohesive risk management plan to fall back on.
While co-mingling your personal funds with your business funds could’ve gone without a hitch so far, you can expect that continuing this practice can lead to serious repercussions soon.
Think missing deductions due to a confusing account statement, coming up with a vague audit trail, and dealing with chaotic taxes. To break the habit, you have to establish clear and practical methods you can apply at once to keep both funds separate.
Subtract from Salary, Not Savings
Apart from the nightmare with your bank statements and taxes, co-mingling these funds put you in danger of jeopardizing your personal obligations. When both areas of your life become financially compromised, setting your money matters in order gets exponentially harder.
If you haven’t assigned yourself a salary yet, now is the time to do so. Allotting a salary can be tricky at first, and some even feel that it’s not essential, but it’s a business practice that successful business owners promote. This effectively gives you a ready source of funds that you can use for additional capital without touching your personal savings.
In the time of pandemic when you may need to crunch those numbers, it’s wiser to subtract from your salary. Once you’ve dipped your hand into your personal slush fund, it gets difficult to stop, especially if your company ever ends up in need.
It could also be illegal to co-mingle unless your company is registered as a sole proprietorship. Even then, this bad habit is deemed unprofessional and often leads to mistakes that are difficult to amend.
No Personal Loan for Business
Yes, using a personal loan for business is a common practice. A lot of banks will allow you to use your loan to pay for business expenses or even start one. Since it’s easier to acquire, entrepreneurs like yourself often feel tempted to resort to this method.
Before you do it, however, consider whether your business can really pay back the loan in full and on time. Any hitch on your payment will reflect on your personal credit report, and it can substantially decrease your chances of getting financial help for big personal expenses like cars and houses.
If you haven’t purchased your dream house in North Carolina yet, then this risk should be among your top considerations. Talk to a reputable lender to know what credit rating you’ll need to get a home loan in your city.
Your current credit standing may be good enough to win you the lowest interest rate. You could miss this opportunity if you’re not confident that your business can return the personal loan you want to apply for. Worse, should this loan be unsecured and you can’t make the payment, you also risk losing your personal assets.
Cut Back and Redirect Costs
When business funds start to dwindle, first-time entrepreneurs immediately look for external financial sources. This may not be a sustainable practice for small business owners, as it often leads to debt. What you should do instead is to study your expenses and identify where you can cut back on costs.
This could mean preparing more of your employees for remote work or finding alternative brands for your office sanitation needs. Can you bring your utility bills down and negotiate your rent? By reducing these costs, you can redirect your business funds to more immediate needs like marketing and customer service.
Continually look for ways to make your overhead and operating expenses more affordable instead of reaching for your personal savings.
To Risk or Not to Risk
While there may be times when you’ll need to make personal sacrifices for the wellbeing of your company, making it a regular practice is unhealthy. Your investors, partners, and employees may perceive this as unprofessional and trust your credibility.
Keep your personal and business funds separate, especially during the pandemic. To avoid risking your financial stability is not a lack of commitment, but a guarantee of sound leadership. After all, it’s challenging to run a company well when you can’t get your personal life together during a crisis.