Financial Discipline: How Personal Finance Carries Over to Your Business

Personal finance is generally concerned with ways you plan for your daily spending, how you take care of the personal needs, and your long-term financial security. Business financing is focused on your business as an entity and looks at cash flow, profitability, and other financial decisions that touch on the business.

When taking care of both types of finances, you will notice that there many areas where the finances are similar. However, they also differ in a few areas. Below are areas where personal finance is similar to or differs from business finance.

Similarities

1. Tracking your income and expenditure

You need to track your income and expenditure whether at a personal level and for your business. You do this by creating a budget which essentially a record of your income sources and ways you plan to the cash.

A personal budget includes the source of income such as salary, dividends or royalties, and planned expenditure such as paying rent, bills, entertainment, food and drink, and healthcare.. A business budget includes such income sources as proceeds from sales, dividends, and contribution. Expenditure includes salaries, utility bills, and capital expenditure.

2. Maintaining a high credit score

The credit score is the measure of the risk that lenders take to loan you their money. When you borrow cash, the lenders look at the likelihood that you will pay back the money. The credit score is based on such factors as the credit history, the number of loans taken and the number of transactions in your account.

You need to maintain a healthy credit score at a personal level and for your business. In business, a healthy credit score enhances access to credit.. This in can help to finance the growth of the business. At a personal level, a healthy credit score allows you access to credit to cater for personal projects and emergencies.

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3. Tracking the net worth

The net worth is the difference between all the assets you have accumulated in your life and all your debts. Tracking your net worth is vital in growing your wealth as well as putting a cap to your spending. Business net worth helps investors and lenders evaluate the financial standing of the business and make a decision on investing in the business.

Differences

1. Acquiring loans

Although maintaining a good credit score is vital to get business or personal loans, the procedure of acquiring the loans differ. In order to find a business loan online, the lender typically requires you to show that the business has a strong cash flow and is able to pay for the loan. On the other hand, a personal loan lender looks at the income and expenses among other things to determine your ability to pay the loan. The security may be business assets for a business loan while personal assets or a guarantor are required to secure a personal loan.

2. Turning a profit

The goal of any business entity is to turn a profit. A venture is said to be profitable if the total income surpasses the expenditure in a given period. Profit and loss-making is only found when dealing with business finance.

3. Leverage

Leveraging is a combination of different techniques with the aim of multiplying the gains. Businesses leverage synergies, borrow money and reinvest their profits to multiply their profits, enter new markets and upsell their products among other things. Leveraging is not practical when it comes to personal activities as they are not geared towards making a profit.

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Keep in mind the differences between personal and business finances when managing them together. Determine when both finances require the same treatment and when each has its own goals. This way, you are able to keep both books of accounts healthy.

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