Very few entrepreneurs understand the truth about starting a business. That truth is, if we want to chase down our dreams, we’re PROBABLY going to have to do it ourselves. Personal Finance is rarely taught in the entrepreneurial world, but mastering this domain is perhaps one of the most critical things you can do for yourself as a founder. Here are the four reasons why it matters so much.
Reason #1: Bootstrapping is in Your Future.
Oh I know, you were told that getting money from Angel Investors and Venture Capitalists is EASY! Or maybe you were told its hard but “you can do it” with a pitch deck and a little effort. And, maybe you can. But what are the chances? According to Fundable, the chances are 1 in 100 that you’ll get money from an Angel Investor and 1 in 2,000 that you’ll get money from a Venture Capitalist. Yikes. So, where does the money come from to start businesses? The vast majority of the money to start new businesses comes from entrepreneurs personal savings accounts. To the tune of almost $50,000 on average. The NET NET? You can continue the fantasy that you’re the “1” in 100 or 2,000. Or, you can start to save money. The truth is you’re probably going to use SAVINGS to start your BUSINESS. And, we save that money by spending less than we make which is the Golden Rule of personal finance.
Reason #2: Your Personal Credit Score Matters.
I have witnessed too many founders navigate the minefield of the startup journey with great success only to be confronted with the second truth, your person credit score will absolutely affect your ability to get growth capital.
Most of the time, Lines of Credit, Business Loans, etc all require a personal guarantee from the founder or founders. That means you and your credit score matter. A lot. The NET NET? Your personal BAD credit can negatively affect your GOOD business.
Reason #3: Expense Tracking & Business Separation.
Businesses are legal entities with a tracking number called an EIN or Employer Identification Number. We are legal entities that also have a tracking number called a SSN or Social Security number. And, at the end of the day we shouldn’t be spending personal money on business and business money on personal items. There should be clear financial separation.
That said, most entrepreneurs on the first day of their new business don’t form a legal business entity, open a business checking account and get a business credit card. More likely, these entrepreneurs are going to use their PERSONAL bank accounts and credit cards while they are developing their business and evaluating whether or not to take it to the next level. The solution to all of this? Use a personal finance tool to track all your personal and business transactions. Use a labeling, tagging or categorization feature to keep track of those expenses that are business related so you can reconcile those transactions later.
Reason #4: Transferable Knowledge.
Have you ever though of yourself as a small business? Probably not but consider this. Businesses and people have a lot in common when it comes to financials. We have money coming in. Income. And, businesses have money coming in. Revenue. And we both have money going out called either Spending or Expenses. And both people and business are left with some balance of money at the end of every month, quarter or year. In business we call this our Profit and Loss or Income Statement. Well guess what? We have something similar in our personal lives called a Personal Income Statement. And, the similarities don’t end there. We have assets and liabilities, businesses also have assets and liabilities. From cash flow, transactions, categorization and reporting, we share a lot in common with business financials. And, what we learn personally can DRAMATICALLY help us with our business financials. This knowledge is largely transferable. Personal Finance is perhaps the single most important skillset for any and every small business owner and entrepreneur to master. Regardless of what the future holds personal finance will put you in control of your financial future.