I suspect most business owners that provide for their families would argue that nearly all business matters are personal! Unfortunately, too many times I have seen clients, intentionally or not, commingle their personal objectives with their business. This can quickly lead to decision making that has calamitous results for both your personal and business planning.
Here are five issues I hear frequently from small business owners:
“I spent too much money and now I don’t have enough to pay taxes!”
--Always categorize business profits before you spend them--
Profits should be allocated to serve the following purposes: business reinvestment, Federal and state tax liability and owner compensation. Work with your CPA to decide exactly what percentage of profits should be set aside for taxes.
“I am certain we will see 50% revenue growth next year!”
--Try to keep your forecasts conservative--
Sometimes small business owners will spend either business or personal funds too quickly because they are over-confident about future business revenues. This leaves a huge hole and the escape can be found only from sacrificing future revenues or future compensation.
“My business doesn’t make enough money so I am cutting expenses.”
--Instead, focus on building revenue--
Sometimes small business owners become obsessed with managing basic expenses. Often, one of the first expenses reduced is marketing. My most successful clients are the ones who maximize the value they offer to their customers and invest in the most effective marketing strategies. Marketing is not an expense – it is an investment and as long as you are generating a strong return on that investment, your revenue growth will dwarf the insignificant operating expenses.
“My business needs to borrow some money to cover expenses.”
--Whenever possible, keep debt levels low--
Many businesses require some form of debt but too many times I have seen debt become an anchor restricting business growth. For example, debt may be necessary for large asset purchases (equipment, vehicles, etc.). If necessary, lines of credit are best used to finance revenue-generating investments. Just be sure to pay back the principal as soon as you reasonably can. Keep in mind: the greater the uncertainty of your future revenue, the less debt you should incur.
“I don’t want to pay myself now; my business needs the money.”
--Remember to compensate yourself reasonably--
Any viable business model allows for owner compensation. Even if your long-term plan is to sell the business for a substantial profit, as a talented individual putting forth time and effort, as a business owner you are entitled to compensation. Be sure to include this your business budget.
In my experience, the most successful small business owners seek to maximize profits, maintain sufficient cash reserves, invest their earnings and take from the business only the money they need. Follow these simple rules and both you and your business will reap the financial benefits.