Being an entrepreneur has become a popular career choice for a lot of people. The freedom and passion involved in starting and running a business are enticing.
But, as with any investment in life, starting a business can cost money. This means that you’ll need to start budgeting.
Running a business may also leave you short of money sometimes. In short, budgeting is an essential skill when you’re starting your own business or running into a dry spell when running it to avoid needing a bankruptcy attorney.
But, a lot of people often confuse budgeting in business with that in their personal life. Many people trying to finance their business think that it’s the same as budgeting for their personal life. In fact, the two couldn’t be more different.
So, we decided to put together a list of the key ways that budgeting for a business is different to budgeting for your day-to-day bills and expenses.
Corporate vs personal budgeting: How financing a business differs from saving
The key difference between personal budgeting and corporate budgeting for your business is diversity. Business purchases and financing are often far more diverse than personal financing.
This is because you have a potentially profitable business to leverage. Below, are a few examples of this diversity.
Your purchases for business are usually additive in value
People often confuse things they buy in their personal life as assets or liabilities. They often think they’re purchasing a house or apartment to function as an asset and things like loans act as liabilities.
Unfortunately, if you’re purchasing something for personal use, it is not an asset. This is because the sole purpose of an asset is to make you money.
In terms of business purchases, like equipment or real estate purchases solely to rent out, these are assets. They stand a good chance of adding value to your company and making you money in the long-term.
This means that you may be able to allow yourself some purchases when trying to save money if you’re purchasing an asset. Many assets can often be sold off of you don’t find value in them for close to the price you bought them for. In many cases, you may even be able to sell them at a profit.
Your budget for your business can be more elastic
Touching on the point above, there may be times when it’s okay to exceed a budget in business. While personal finances are usually rigid due to bills and expenses being pretty stable, business expenses are another story. The same can be said if salary and income.
You can often exceed your budget during quiet periods if you know they will be followed by busier times. This will allow you to tighten your spending during profitable periods to keep your financing in check.
Business financing is more isolated
There’s a saying in business: “each business stands on its own.”
This means that you shouldn’t use the profit from one company to finance another, less profitable, business. While this sounds like a drawback if you have multiple businesses, it’s actually a benefit.
If you have more than one limited company, you can limit the damage each one of them could do to another business or your life if not profitable. This can allow you to focus on the struggling business, or cut it loose.
On the other hand, bills and expenses in your personal life have a more global impact. They affect every area of your life. This includes your quality of life, to the strain placed on all of your businesses.
This not only puts a higher emphasis on personal budgeting but also how you may manage your time between businesses.
Business financing is open to external investors
This is a big difference between personal and corporate budgeting. While getting a loan or depending on your credit card is the final option for personal budgets, investors are an option for businesses.
Investors can often buy shares in your company for capital investment. This can allow you to increase your budget for periods of low sales, or even save your business from closing. All without accruing debt or more bills.
However, care should be taken. In the long-term, taking on an investor means another person will have a say in the choices made in your company. It also means you’ll be splitting a percentage of the profits with someone else from then on.
Tax efficiency plays a role in budgeting decisions
In your personal life, the tax remains a relatively constant expense. This is because employers have very little control over how tax efficient their spending is.
Business spending is a whole other matter. Business expenses, trips, and donations are all a few expenditures that aren’t taxed.
This means that you may be able to save money by spending on a business trip that will save you some money from your tax returns. So, keeping tax efficiency in mind is key when budgeting for a business.