- 5 REASONS YOUR BUSINESS NEEDS A BUDGET In standard
OK, I’ll be frank. Sometimes business owners can be the greatest downfall of their own companies. You’ve probably heard the hundred ways this is possible from management and HR issues to lack of “business” skills. I’m in the business of finance, so I’ll talk about only one—handling money.
There are two scenarios where a business can be jeopardized by the way the owner handles money:
- When the owner takes too much cash out or depends on the business to sustain their lifestyle.
When the business owner lends too much to the business and seriously jeopardizes their personal financial wellbeing.
I’ve seen both and it is pretty ugly.
In the first case, a business is doing well and kicks off a ton of cash. After a year more or less of great returns the owner begins to lose the “bootstrappy-ness” of their beginnings and feel things have been going well enough to buy a bigger house or upgrade their car.
They start to grow into their business’ cash flow.
Some start taking more out in draws—a lot more. And if they aren’t careful, some take out more than what the business is generating. I’ve seen business owners run up hundreds of thousands of dollars on the business line of credit to purchase personal items.
The biggest problem with this: the business is starting to starve.
That cash that gets sucked out to buy the car or the house should have been left in the business for the “rainy-day” fund—or the “hire a new employee” fund—or “upgrade our systems” fund—or the “new product development” fund. But as soon as it hits the business bank account it is whisked away.
Growth in the business stops or slows significantly.
What is more devastating is what happens when the market turns south. The credit line is almost maxed—and those steady cash withdrawals—well, they aren’t there for the taking anymore. So what happens to the owner?
They still have the mortgage to pay on the large house and on the fancy car. Their kids are enrolled in private school. They have bills to pay—but the cash isn’t coming in. They head into the death-spiral of cutting costs in the business, and suffocating it even more before they decide to start calling the bankruptcy attorneys—for their business and for themselves.
On the other end of the spectrum are the other business owners—those that put all of their life savings and then some into the business. They become maxed out.
They have a payroll– and they’re not on it.
Or if they are, they take a measly pittance for the work they do. They have tapped all their resources and have no other source of funds—the banks won’t lend to them because they have no collateral (it’s all in the business) they aren’t generating the returns or aren’t in a sexy-enough business to win the attention of private money or all other sources have proven to be dead ends.
The American dream of owning a business turns into a nightmare, exhausting them and exhausting their families who bear the burden.
The problem with these companies is that, in most cases, there is something broken within the business.
The business owner is too busy fighting fires to step back and see the real problems. A colleague of mine has a great question he poses to entrepreneurs. “If your waste basket caught fire every day, and you had to put the fire out, how long would it take you until you got fed up enough to figure out what’s making it burst into flames?”
These business owners they feel they have to work harder to get to the “Mecca” where the business is kicking off great returns. Meanwhile, they have, in essence, lent their personal money to their clients by extending terms to them, have issues with late payers and have costs that are out of line with their pricing. They don’t see this—they just are reaching for the next sale.
What they don’t realize is that that next sale starts the cycle again.
These two situations may seem like opposite ends of the spectrum but they are really the same issue–the line between business money and personal money is blurred.
When we have these conversations with business owners, we’re seen as naysayers and meddlers. In either case our message isn’t one the owner wants to hear.
The message is simple—it’s about balance.
It is about balancing the need to leave enough money in the business—or not contributing more—and giving the owner enough compensation to enjoy the lifestyle they want to live.
There is no magic formula on calculating the balance, unfortunately. It’s a give-and-take– an imperfect science. Because the flow of cash between business and personal are so intertwined, when one or the other is way out of balance the end result could be disastrous. It’s an important part of planning, and one that should be considered with as much importance as buying a piece of equipment or buying a new house.