It’s easier now, more than ever, to start your own business. You can effortlessly build an e-commerce site and sell products online. If you’re one of the new entrepreneurs that have entered the market, you must know how to manage your finances.
Two of the most critical financial aspects of any venture are personal and business finances. You will need to understand these factors so that you can avoid tax troubles and ensure the growth of your company.
For small and medium business owners, it may be tempting to lump these funds together. After all, you did use personal money for your capital. You may be thinking that it shouldn’t make a significant difference in the long run. However, you must keep these finance types separate whether your company is a corporation or has a sole proprietorship setup.
Personal and business finance are different. That’s why it’s recommended that entrepreneurs keep them separate. Maintaining a distinction between the two can come in handy during IRS audits or filing for business credit.
Avoid signing personal guarantees for your company since this puts your private assets at risk. You can read up on online resources to learn how to manage debt and improve your enterprise’s credit rating.
Differences in Business and Personal Finance
Personal finance pertains to how you manage your financial assets through saving and investing. The variables that come into play for this type are budgeting, banking, tax, estate planning, insurance, mortgages, investments, and retirement planning.
It varies per individual and depends on income, expenses, and lifestyle. Moreover, personal finance also considers personal goals and desires and how you can meet those needs without going over your financial limitations.
On the other hand, business or corporate finance talks about the company as a whole and what financial decisions you should make for its growth. It typically deals with capital structuring and investments.
Plus, if you have a corporation or partnership, you have to ensure that each long- and short-term financial plan, as well as strategies, will maximize shareholder value. One emerging issue for businesses is whether your company should accept Bitcoins as payment. You have to weigh the pros and cons as well as coordinate with your investors about this particular decision.
Here are some key differences between personal and business finance:
1. Legal Regulations
The government has put up laws to protect business owners and investors at the federal, state, and local levels. These rules influence how you report your income, comply with taxes, and pay your employees as well as shareholders.
Some types of taxes you should know about:
You need to do the paperwork for this tax annually to inform the government how much income your company has earned. At the end of the year, you can file for tax return where you calculate your liability and request refunds if you have evidence of overpayment.
Having employees require you to pay taxes for Social Security and Medicare. There’s also the federal income tax withholding as well as unemployment tax.
Excise taxes are imposed on particular products that you use for your business. Typically, these are already included in the price of the goods. Most companies that should be mindful of this law are manufacturers, retail sellers, and service providers, among others.
For personal finance, the only major factor you should be aware of is reporting your income tax. It’s imposed on wages or salaries, dividends, and interest rates that you’ve earned throughout the year. You don’t have to worry about employment and excise taxes.
2. Income Streams
With several business resources and tools at your disposal, your company has more opportunities and avenues to acquire profits. You can choose to set up your enterprise to earn income through the following revenue streams:
This revenue refers to customer payments in exchange for your products.
Time-based income is calculated by how many hours the company allocated to provide you with their service.
Think of this type as a package deal where you earn revenue through one-time projects. The calculation may include the number of products set aside for that job as well as the time spent for it.
This model includes earning income from subscription fees, renting or leasing your properties, licensing content, brokerage fees, and advertising charges.
As a single entity, your personal finances can’t compete with the many resources and tools available for your business. Your earning opportunities are limited to what you can accomplish.
3. Risk Management
More income streams ensure that your company can stay afloat even when one part of your investment portfolio underperforms. There’s more allowance for taking risks and making mistakes with business finances because you can always adjust other costs in case a venture doesn’t turn out well.
With personal finances, there’s a more significant impact when you lose out on investments.
4. Investments vs. Expenses
In business, most expenses are seen as investments. This means that a return is expected from the amount you put in a particular investment strategy.
Meanwhile, for personal finances, you can spend money on things that give you joy but don’t necessarily contribute to your income.
Similarities of Business and Personal Finance
However, personal and business finance operate on the same financial principles. There’s still the need to make money, save funds, find lucrative investments as well as grow and protect your assets.
These are the two primary similarities for both types of finances:
1. Balance Income and Expenses
With personal and business finance, you need to ensure that there’s equilibrium between the money that comes in and the amount that’s sent out. It’s even better if you have more income than expenses since this means that you can save the extra funds for emergencies or retirement.
2. Match Short- and Long-Term Goals
You also have to make sure that your short-term goals support your plans for the future. For instance, if you want to grow your business into a franchise, the financial decisions you make today should facilitate that aspired growth. The same goes for personal finances when you save money now as an investment for your retirement years.
As an entrepreneur, it’s beneficial for you to understand the similarities and differences in personal and business finance. They present different regulations and opportunities, which you should know about to stay in compliance with the law as well as facilitate your company’s growth. Nonetheless, they operate on the same financial principles of balancing income and expenses as well as ensuring that your short-term and long-term goals match.