Many business owners and entrepreneurs find themselves in debt, which can be challenging to get out of. According to a report by the National Federation of Independent Business, small business owners ranked “financial management/bookkeeping” as their sixth most important concern, with 22 percent of respondents indicating that it was their top worry.
But there are several things business owners can do to avoid going into debt. If you’re worried about your finances, consider these tips on how to manage your finances to avoid going into debt.
1. Know where your money is going.
The first step to managing your finances is to keep track of where your money is going. There are many ways to do this, but a budgeting app like Mint or You Need a Budget (YNAB) is a good start. These apps will help track your income and expenses to see where your money goes each month.
Knowing how your money is spent also means knowing your business’s financial health. You should regularly review your business’s financial statements, including the balance sheet and income statement. You want to ensure your business is generating more revenue than it’s spending. If it’s not, you need to find ways to cut costs or increase revenue.
2. Make a plan.
Once you know where your money is going, you need to plan how to save money. This may involve cutting back on some expenses so that you can put more money towards savings or debt repayment. It may also include finding ways to make extra money to accelerate your debt repayment plan. Whatever it is, make sure you have a plan in place so that you’re not just randomly saving or spending money each month.
But when you’re making a plan, don’t forget to account for unexpected expenses. You should have an emergency fund that can cover three to six months of living expenses in case you lose your job or have a medical emergency. This will help you avoid going into debt if something unexpected comes up. Look at your budget and see where you can cut back to build up your emergency fund.
3. Don’t commingle personal and business finances.
One of the worst things you can do for your business is commingling your personal and business finances. This makes it challenging to track your business expenses and can lead to problems if you ever need to file for bankruptcy. Many business owners commingle their finances because they don’t want to open a separate bank account for their business. But keeping your finances separate is essential to avoid any confusion or problems down the road.
Especially when you spend a lot of money for personal use or make large purchases, it can be challenging to track what is a business expense and what isn’t. Entrepreneurs in the process of a house purchase may be tempted to use business funds to help pay their home mortgage loans, but this can cause problems later on. If the business fails, the owner may be unable to deduct the business expenses from their taxes. Additionally, the commingled funds could be at risk if the company is sued.
4. Use credit cards wisely.
Credit cards can be a helpful tool if you use them wisely, but they can also be a financial trap if you’re not careful. When used responsibly, they can help you build your credit score and earn rewards like cash back or points. But if you carry a balance on your credit cards, you’ll pay interest, which can add up quickly.
If you use credit cards, make sure you pay off your balance in full each month. And if you can’t pay off your balance, look for a credit card with a 0% intro APR to avoid paying interest on your balance.
5. Stay disciplined.
The most crucial part of avoiding debt is to stay disciplined with your finances. This means sticking to your budget and not spending more than you can afford. It also means ensuring that you’re putting money away into savings each month to have a cushion in an emergency.
While it can be difficult to stick to a budget, it’s important to be disciplined with your finances to avoid going into debt. One way to stay on track is to automate your finances so that you’re less likely to make impulse purchases. You can set up automatic transfers to your savings account so that you’re automatically saving each month. You can also set up automatic bill pay so you never miss a payment.
If you’re careful about managing your finances, you can avoid going into debt altogether. By tracking your income and expenses, planning how to save money, and staying disciplined with your spending, you can ensure that your finances are always under control. So don’t wait until you’re in debt to start taking control of your finances—start as early as now.