What Personal Finance Taught Me About Running a Small Business

A lot of the financial principles we learn as individuals actually translate surprisingly well into running a small business. Of course, businesses can become incredibly complex and as a company grows, you start dealing with investors, debt structures, complex accounting, tax strategies, working capital requirements, and all sorts of financial concepts that don't really have a personal-finance equivalent.

But for a small business? I think a lot of the basic rules are exactly the same. And this is actually where a lot of my own business financial philosophy comes from.

How I Learned Business Finance

One of the questions I get asked most often is “How did you learn all of this about business finance?” And then usually the follow-up question is “How can I learn more about finances if I didn't have a finance background before starting my business?”

My answer is almost always the same: Start with personal finance.

Before I started working with Swift, I worked in the personal finance industry. I worked with thousands of financial advisors, and at one point I was personally licensed as a financial advisor. So when I eventually started doing the finances for a small business, I already had a foundation in how to think about money, risk, investing, budgeting, and financial decision-making.

I didn't learn everything I know about business finance from a textbook about running a business, a lot of the foundational principles came from personal finance. And honestly, I think that's a great place for any small-business owner to start.

You don't necessarily need to understand complicated accounting principles or build an incredibly sophisticated financial model to start making better financial decisions. Start by learning how to manage money well personally, then take those concepts and apply them to your business.

There are obviously differences between personal and business finance. And as a business gets larger, those differences become much more significant. But when you're running a small business, many of the same fundamental questions still apply:

• How much money is coming in?
• How much is going out? 
• What can I afford? 
• What happens if something goes wrong? 
• Am I saving enough? 
• And is this actually sustainable?

Here are some of the personal finance principles I've carried over into small-business finance that you should look into if you haven’t already.

1. Expect the Worst

One of the most basic principles in personal finance is to understand your risk tolerance and understand the downside of every action you take. That is, don't assume everything will go perfectly.

I think the same principle should apply to your business forecast and business plan. When you're forecasting revenue, don't use the number you're hoping to make. When you're forecasting expenses, slightly overestimate them.

I'm not talking about dramatically underestimating revenue and dramatically overestimating expenses to make your business look terrible, I'm talking about building in a little bit of conservatism. Because if your business only works when everything goes exactly according to plan, you don't actually have a very good plan.

A conservative forecast gives you room for reality: Maybe enrollment is lower than expected, maybe a major customer leaves, maybe your expenses are higher than you anticipated, maybe something breaks, or maybe you have an unexpectedly slow month.

If your forecast already assumes that things might not go perfectly, you're much more likely to be able to absorb those surprises and still keep on track with your yearly goals. Not to mention, when things do go a little wrong, you don’t feel completely lost or like it was useless to make a forecast.

I almost always plan conservatively and we almost always end up right on target.

And if things go better than your forecast? That's a great problem to have!

2. Spend Less Than You Make

This is probably the most obvious personal finance principle of all, “Don't spend more money than you have.” In business, this becomes “Your expenses need to be lower than your revenue.” That's profitability.

It sounds incredibly simple, but I think small-business owners sometimes make this more complicated than it needs to be. There are plenty of reasons you might intentionally operate at a loss, but eventually the business has to be able to support itself.

One of the clearest examples of this is program profitability. Let's say you run five different programs, four are profitable and one consistently loses money.You try changing the price, adjust the staffing, change the schedule, try different marketing strategies, give it time, and it still loses money. At some point, you have to ask: Why are we continuing to run this program?

It doesn't matter how much you like the program or how much potential you think it has, if you've tried multiple ways to make it work and it continues to lose money, you cannot indefinitely keep spending more money than you're making.

That's the business equivalent of continuing to put an expensive purchase on your credit card when you already know you can't afford it. Sometimes the financially responsible decision is to stop.

3. What Gets Measured Gets Managed

There is a popular business saying: “What gets measured gets managed.” It's often attributed to Peter Drucker, although the exact attribution is questionable. Regardless of who originally said it, I think the underlying concept is incredibly useful.

In personal finance, one of the first things people are told to do is create a budget. Why? Well there are a few reasons:

• You’re more likely to make intentional spending decisions.
• You’re more likely to find things that you shouldn’t be paying for.
• You will often find hidden spending habits you didn’t know you had (many people think they spend FAR less than they actually do).

The same thing happens in business, instead of having a vague idea of how much revenue you're going to generate or how much you're going to spend, you create a forecast. Now you have something to compare reality against: You thought you'd generate $40,000 in revenue this month, but you generated $35,000, you thought payroll would be $12,000, but it was $14,000.

Your forecast becomes an early-warning system and that's where I think the phrase at the beginning of this section can be expanded: What gets measured gets managed, and what gets managed gets the opportunity to improve.

You can't fix a problem you don't know exists. If you aren't tracking your expenses, you can't identify where you're overspending. If you aren't tracking revenue by program, you can't identify which programs are underperforming. If you aren't forecasting cash, you can't see a cash-flow problem coming.

You don't need hundreds of spreadsheets and thousands of KPIs, you just need to know which numbers actually matter to your business—and pay attention to them consistently.

4. Build an Emergency Fund

Personal finance teaches us that having cash available for emergencies is important. Businesses need this too.

In a business, we might call it a cash reserve rather than an emergency fund, but the idea is essentially the same: things break, customers leave, revenue fluctuates, and unexpected expenses happen.

If your business has exactly enough cash to cover its normal monthly expenses, you're operating with very little room for error, and this is where I think a good cash forecast becomes incredibly valuable.

You don't just want to know whether you are profitable today, you want to know “If things continue roughly as expected, how much cash will we have six months from now? What happens if revenue is 10% lower than expected? What happens if we have a $15,000 unexpected expense?”

A really great example of this was the Covid shutdown. Many gyms went from bringing in a healthy revenue to now possibly bringing in nothing, and certainly not getting any new clients. All while having to still pay things like rent, subscriptions, and some payroll. The gyms that survived had a healthy cash reserve! I often think of this scenario when planning how much cash to keep on hand: “How much cash would it take to get through a few months of required expenses with NO revenue?”

The goal isn't necessarily to keep enormous amounts of cash sitting idle forever, the goal is to understand how much cash your business needs to withstand the normal uncertainty that comes with running a business.

5. Don't Let Your Lifestyle Grow Faster Than Your Income

Personal finance has another concept that I think business owners can learn from: lifestyle inflation. You get a raise, and suddenly your expenses increase. Eventually, you're making significantly more money but somehow don't feel any wealthier.

Businesses can do exactly the same thing: revenue goes up, so expenses go up.

Then revenue goes up again, so the business hires more people, adds more software, moves into a bigger space, increases its marketing budget, and adds more programs.

Suddenly, the business needs substantially more revenue just to maintain its new normal. 

I saw this happen at Swift this year. At the beginning of the year, we were projected to make considerably more money than we ever had as a business, and then we started outperforming our projections. We were looking really, really good, and naturally, the temptation started creeping in: We could spend some of this extra money on things we'd been putting off, buy some things that had been sitting on our wish list, invest in things that would be nice to have, even if we didn't actually need them.

And honestly, it was tempting. But I held us steady.

I wasn't totally convinced that the profitability we were seeing early in the year was actually going to be our reality at the end of the year, and I'm really glad I did because summer came around and, as many businesses experience, we saw a dip in sales. But this summer was particularly challenging for us because the dip was much deeper than we had expected.

Suddenly, those amazing projections from the beginning of the year didn't look quite so amazing anymore. We're still expecting to have a better year than we've historically had, but we're no longer looking at the huge profit number we were seeing earlier in the year.

And this is exactly why I think businesses can learn from the concept of lifestyle inflation: We saw our income increase, but we didn't immediately increase our expenses to match it.

If we had, we would have spent money based on a level of profitability that ultimately wasn't sustainable. Instead, we held our expenses relatively steady and waited to see what actually happened. That's the business version of not letting your lifestyle grow faster than your income. 

This doesn't mean you should never spend money when your business is doing well. If you've had a great year, you should absolutely be able to invest in the business, pay yourself, or spend money on things that will make the business better. The key is to distinguish between a sustainable increase in income and a temporary increase in income.

If your revenue increases by $100,000 but your expenses increase by $95,000, you've created a lot more work without creating much more profit, and if that additional $100,000 turns out to be temporary, you've now created a permanent expense structure that your business may not be able to support.

Sometimes the best financial decision you can make when things are going really well is to do nothing. Let the good months play out, let the money accumulate, see what happens during your slower season. Once you know that the additional profitability is real and sustainable, then decide what you want to do with it.

You don't have to spend every dollar just because you have it.

6. Know What You Can Actually Afford

There's a difference between being able to make a payment and being able to afford something.

Personal finance teaches us this pretty quickly. Just because you can afford the monthly payment on a car doesn't mean you can actually afford the car.

The same thing applies to businesses: Just because your business can technically make the monthly payment on a new piece of equipment doesn't necessarily mean the purchase makes financial sense. Before taking on a new expense, I want to know:

• How does this affect monthly cash flow?
• How does it affect profitability?
• What happens if revenue is lower than expected?
• What other expenses will this create?
• What happens to our cash reserve?
• Can we get out of this agreement if it isn’t working?

A good forecast lets you answer those questions before you make the commitment. That's much better than making the purchase and figuring out afterward whether you can afford it.

Final Thoughts: Small Businesses Don't Need Complicated Financial Models

This is ultimately why I like bringing personal finance principles into small-business finance.

Small businesses don't necessarily need the same financial infrastructure as a Fortune 500 company, they need to understand the basics really well: 

• Spend less than you make.
• Don't assume everything will go perfectly.
• Keep cash available for emergencies.
• Track the things that matter.
• Know where your money is going.
• Don't let expenses grow faster than revenue.
• Make financial decisions based on what the business can actually afford, not what you hope will happen.

As a business grows, its financial needs will become more complicated, but I think it's easy for small-business owners to overlook the simple principles because they feel too basic.

If you're a business owner who doesn't have a finance background and wants to get better at understanding your numbers, you don't necessarily need to start with an accounting textbook.

Start with personal finance. Learn how to budget, forecast, save for emergencies, make decisions based on what you can actually afford, and understand where your money is going. Then start applying those same principles to your business.

Because ultimately, the goal of financial planning isn't to create the most complicated spreadsheet, it's to help you understand your business well enough to make good decisions.

And a lot of the lessons that help us manage our personal finances can help us do exactly that.