Most people who have been handling their personal finances, and believe that they have done a good job also believe that they can easily transmit these management skills when they start a business. Most therefore rarely look out for the help and guidance that they need when planning their business finances and sometimes, this can have disadvantages for the business. Here is what you should know about personal finance vs. business finance, and the fundamental difference that should help you decide when you need help.
The basic balancing principle
Whether you are handling personal finances or business finances, there is a basic balancing principle which will always be involved. For instance, when dealing with your own money, you need to think about the fact that you have needs which have to be met today and at the same time, you have to save something for retirement. In business, you need to think about current business expenditure and planning for the growth and expansion of business. In both cases, it is your responsibility to decide when to save and when to spend, as well as how much to spend.
Differences-the leveraging concept
There are differences which exist between personal and business finance management. The most significant difference is leverage in business. Here, you get to tap into unsecured small business loans and use the money to buy inventory, expand services or buy business equipment which increases the productivity of your business. The aim is to get profits from the borrowed debt, pay off the debt and scale your business operations in the process. This is a concept which needs a lot of strategy because if you were to borrow money and invest it in a venture that does not give back returns, you will still have the debt to repay and this could ruin your business stability. Leverage is therefore one area that you may need assistance from business financial advisors before trying.
Profit and loss are part of the process
Another thing that you will find similar between managing your own finances and that of a business is that at times, you make an investment and it brings in huge returns and at other times, the investment does not bring in the returns that you imagined it would. So, for instance, you could invest in the stock market hoping that the share price will go up, then changes in the market drive the share price further down, leading to losses. The same thing happens in business, you could invest in a certain asset thinking that the returns will be huge and positive, only to end up disappointed. In both cases, the key is learning how to take calculated risks and always to have measures which blanket you against losses which could lead to loss of a house or a business going bankrupt.
The other differences which exist between business finances and personal finances are the legal obligations and also taxation. The stakeholders that you have to manage in business are also different from those that you have to manage in personal finance. Finally, it is important to realize that while a business will go on and on for centuries, if well planned, your life does have an expiration date. This is another fundamental difference which should help with leverage in personal finance goals and your business finance goals. With these factors in mind, you can choose which aspects of business finance you can manage and the ones you need help with.
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