It is perhaps very little surprise that cash flow is one of the most common reasons for startups failing. What may be more worrying, however, is the fact that many businesses run out of cash due to poor planning, according to a CNBC report. Poor financial management of a business can often reach into personal life and shine a light on wider budgeting deficiencies, and the shock of losing a business can often create the need to make hard personal choices. One of the key skills of being an entrepreneur is separating the two fields of finance, but also learning how one can support the other safely.
Keeping risks low
Startups by nature are a risky venture. There is no guarantee that the product or service will work, even with the best planning and market research, and many fail within a year and the majority within three. Playing it safe with financing and only taking finance that is affordable and makes sense is a crucial first step. When you have a poor credit history or lack the fundamentals to make repayments on premium loans, it can be disheartening, but that is why products exist for entrepreneurs with simple or adverse credit histories; to help manage risk. If the business does fail, a properly structured credit line focused around the business only will help to manage your liability. This counts for venture capital, too, which Forbes estimates there is up to $290 billion of which is unallocated; by keeping personal and business separated, it makes for easier conversations with investors during hardship.
As the Bank of America outlines, even the simple distinction between an LLC and sole proprietorship can be enormously impactful in times of difficulty for the business. The former will typically allow you to retain your assets; the latter, not necessarily. On from that and you have the various tax codes and business accounts that further insure and provide resilience against business failures impacting your personal life. It’s essential to practise good corporate governance and appreciate the bureaucracy that will protect your own finances.
Filling in the gaps
During times of hardship, creditors will explore every avenue possible to recoup funds and find ways to express liability on the company. That can mean looking through records and trawling every submission made in the name of the business. That can include how credit lines are applied for, but also the use of credit cards, utility accounts, and others, according to the government SBA. While a perhaps simple tip, it’s a crucial one. Assign everything to do with your business to the business in its name, and be diligent with it.
This approach may seem simple, but it’s absolutely crucial to managing your business properly. Separating your name and business liability is a crucial foundational tool in creating and managing an effective business and, ultimately, turning a dream into a reality. Don’t underestimate its power in business and in your personal life.