Founders: Win in Startup by Avoiding These Financial Mistakes

Startup founders spend most of their time thinking about the financial health of their company. One area they don't consider as much is their personal finance because 40% of people still will never achieve a net worth of more than $10,000.

Your personal finances are just as important as the financial health of your company. One impacts the other, particularly during the early months and years of running a company. Here are some important aspects of personal finance as an entrepreneur.

Don't Mix Up Your Accounts

One of the biggest mistakes startup founders make is that they don’t separate their personal and business finances. This is easy to do as a startup because in the beginning you may not form an actual corporate entity. Therefore, the money will be coming out of your personal account.

This is fine in the beginning, but you need to plan and keep track of your personal and business spending later on for tax reasons. A lot of company founders have found themselves in hot water because they couldn’t keep track of their business expenses and their filings were wrong.

At the very least, you should create a spreadsheet so you can track your business expenses and compare them against your bank statement.

Take Care of Your Credit Score

There’s an increasing trend in which more and more startups are deciding bootstrap. Bootstrapping means that you are going to build a business without bringing in any outside financial help. But, the limited amount of resources causes limits what you can do.

In the beginning, your company will have no business credit score and therefore, your options are still limited. But your personal credit score can be used to the raise the funding you need. More lenders are willing to use the credit score of the startup founder to decide whether they want to lend them money.

Great Personal Finance Equals Great Business Finance

It’s easy to look at these terms as two separate things. The reality is that they are essentially the same thing. They just belong to different entities. If you don’t have your personal finances in order, the chances are you don’t have your business finances in order either.

Begin practicing good personal finance habits now so that you can prepare for the difficult world of business finance later.

Protect Your Personal Finances

Personal finance doesn’t have to be connected with business finance, unless you want it to. Some startup founders will risk everything on one big business idea. They will remortgage the house and blow their entire savings on getting their startup off the ground. This is a personal decision and they are putting everything on the line. It is also something that many people who tried this route will tell you to avoid doing at all costs.

However, most startup founders decide to protect their personal finances and you can do this too. To manage this problem, you have to be able to setup a company so the corporate entity takes responsibility for any debt, rather than taking it from your personal account.

Any loans you take out should be unsecured loans. Secured loans mean that you are putting your personal assets up as collateral. If your startup fails, your personal finances will become adversely affected. And those finances could be crippled forever, especially if you experience a personal bankruptcy.

The Startup Founder Approach to Personal Finance

Startup founders must take into account their personal finances even when they are negotiating deals. You should have your personal and business expenses completely separate. Ideally, you should have independent accounts. If not, you should at least keep a record of everything on a spreadsheet.

You should have a buffer for when your startup isn’t making any money. Unless you have support, you need to have a savings fund so you can cover your regular expenses. How much you have depends on you personally. You may decide that you need at least three months, but others decide they need six months or more.

Handling personal and business finance can be difficult. But if you do it right you can make sure that you don’t run into financial difficulties later. They are more closely related than you think, so make sure you keep a handle on them both.

What are your top tips for handling personal and business finances?