Personal finance mistakes to watch out for

PiggybankEntrepreneurs often fail to pay attention to their personal finances, which are often interconnected with their business. Here are some financial issues you might not be thinking about, but you should be:

1. Protecting your personal credit rating. Often, small-business owners don’t consider how their company can affect their personal credit rating, says Bill Collier, author of How to Succeed as a Small Business Owner … and Still Have a Life (Porchester Press, 2006). For example, if you sign a personal guarantee when buying from a supplier, you are liable should your business be unable to pay within the typical 30-day term. If you don’t come up with the money, your supplier can file a report with one of the credit rating agencies and damage your personal rating. “Keep yourself from being personally obligated to the business’ debts as much as possible,” Collier advises. If you are worried about making payments on time, seek suppliers who don’t require you to sign a personal guarantee and are willing to extend credit terms to the business.

2. Diversifying your portfolio. Some small-business owners gravitate toward personal investments in companies in their same industry, says J. Jeffrey Lambert, a Sacramento, Calif., financial planner and co-author of Ultimate Guide to Personal Finance for Entrepreneurs(Entrepreneur Press 2007). That lack of diversity can make an entrepreneur even more vulnerable to an industry downturn. For example, the owner of a technology business may like investing in other tech-related companies, but both his business and his portfolio could face many of the same risks. To protect your wealth, Lambert recommends aiming for no more than a 5 percent investment in any one company. Furthermore, consider broad-based mutual funds that are not concentrated in your industry and include a mix of stocks and bonds, large and small companies, and international as well as domestic investments.

3. Choosing the right business entity. Be it a partnership, sole trader, or Limited company, the choice of business entity will affect your personal finances. It’s wise to investigate the tax laws, as well as seek an accountant’s advice about the best type of business entity for you. As a sole proprietor or partnership, you would be held personally liable if your company faced litigation or creditors demanded payment of business debts, while a Limited company is held liable instead of you personally.

4. Discussing finances regularly with your spouse or partner. Small-business owners can get so wrapped up in their company that they make the mistake of leaving family finances completely in the hands of their spouse or partner. If you and your partner are not talking regularly about your personal finances, you should set a date on the calendar once a month to make sure you confer. It takes a lot of energy and focus to manage a business; sometimes it’s easier to let our personal finances slide. If you just make it a priority and look at the numbers every month, you can make a lot of progress.

5. Keeping personal credit cards out of your business. While a personal credit card may seem like an easy source of cash for your business, you can quickly incur high interest costs. Unless your business is very new or you have a poor credit rating, a better option is a loan from a small bank at a much lower interest rate than most credit card issuers charge. While it may take extra work to secure a bank loan, it will help you establish a solid credit rating for your business in the long run.

6. Aligning your salary with your business cash flow. Small-business owners often don’t adjust their own salaries to match their company’s fluctuating cash flow and end up borrowing money to pay themselves. Taking borrowed money and turning it into taxable income is not a good idea. Instead, you should be diligent about matching your own pay with the cash flow of the business and taking home less when your company’s cash flow is lower.