Do you have any personal savings? Do you make any distinction between your personal finances and your business finances?
If you are a small business owner, chances are strong you answered “no” or “not much” to at least one of the previous questions. And that’s not good if you want to be a successful small business owner – which, of course, is our goal to help you become and remain!
Perhaps you used up some or all of your savings starting your business, and that is fairly typical and not the focus of this commentary. Rather, the focus here is upon how “yes” answers to these questions can be not only the outcome of but also facilitators of your success!
It Starts with the “It’s All the Same” Mentality
Business needs money? No owner draw this week or the cookie jar at home gets raided. Mortgage or personal bills are past due? Big owner draw this week and business account gets raided.
Too often, there is little or no distinction made between “business” and “personal” in the minds of many business owners. “It’s all the same,” or so goes the thinking of many…
Yes, it will always be true that business and personal are highly intertwined for business owners. But making no distinction between the two often leads to a neglect of personal needs and over-reliance on the owner’s personal savings or finances. And doing so functions like an advancement-disrupting personal subsidy to poor business performance. (Or in reverse – a subsidy from a solid business to a problematic personal situation.)
Don’t do that! In a lot of cases, this results in owners maintaining business models that are less profitable and efficient than they need to be to sustain their business and personal success. And that road often leads to long-term frustration that can end in bankruptcy.
Instead, keep the pressure on your “business” self to take care of your “personal” self! Insist that your personal needs must be planned for and taken care of as well your business’ needs.
Yes, you may love your business so much that you’re willing to personally sacrifice for it. That’s ok, and sometimes necessary – especially during startup or distressed economic conditions. But, no, your standard mode of business operation should not be based upon you personally picking up the tab every time your business needs a few more bucks.
Create Hard Distinctions
The first step is to create hard distinctions between business and personal. You should always have separate business and personal bank accounts, as well as separate business and personal credit card accounts. If you don’t now, separate them immediately and do not comingle them.
Not only are there financial reasons to do so, there are important liability limiting reasons this discipline must be followed when operating a business under an LLC or Corporation business structure (as discussed here).
Make Personal and Business Off Limits to Each Other
Don’t dip into your business money to take your family out to dinner. Don’t dip into your personal money to pay for that large materials order. Don’t do so… because when you do, it makes one side (personal or business) seem like it is financially better off than it is.
It temporarily turns off the beneficial alarm that tells you when something is wrong – and shifts financial burdens to the wrong side of the equation… i.e. business finances covering for personal problems, or personal finances covering for business problems.
As you would never disable a fire alarm in your child’s room, you should never disable the natural financial warning systems that warn you when and where there’s a problem. So, keep your alarms enabled by keeping your personal and business money separate – and respond appropriately to the “fire” the alarm identifies when it rings out!
Pre-Set Draw and Reinvestment Plans
I know what you’re thinking… well, how do I get paid from my business then? And where do I get money to continue growing my business?
Excellent questions! You start by planning ahead to do both of these things… And then faithfully and methodically follow through with your plans as time goes by.
Every week, two weeks or month, you should take a draw to cover your personal needs. Figure out what you need in draws per year and divide it by 52, 26 or 12 depending on your draw frequency. And get in the practice of taking regular draws.
If your draw proves to be too much for your business to cover, that’s an alarm. Likely it means your business is not generating enough profit. If you respond by dipping deeper and deeper into your business resources, the alarm may stop ringing but your business may burn down. But if you react as you should by seeking to generate more business profit, you just may become like the hero firefighter that saves people from imminent peril.
Likewise, if your business is growing, has trucks or assets to buy, debts to pay, and accounts receivable, your business requires reinvestment that you need to account for as well. And, you know that “bottom line” number on your Profit & Loss statement you count on for your draw? That’s not all for your personal needs. Some of it must be used for reinvestment in your business!
So plan accordingly. In businesses I have worked with, as much as half or more of their “bottom line” needs to be made available to the business for reinvestment. Your business’ reinvestment requirements could be more or less than 50% of your business’ net income, but they’re surely something you must plan to cover.
Calculate and Set Targets
Again, you’re probably saying that sounds well and good, but wondering how do it – time efficiently! Answer: by regularly using a worksheet that makes this process as simple, clear and focused as possible.
We’ve created a planner that takes seven key inputs from you and produces a concise plan with specific financial targets for your business that will help you ensure your personal needs are met as well as your business’ reinvestment needs.
In closing, let’s say you use the preceding worksheet and its answers and implications set off an alarm or cause you to start thinking about how you can make your business more profitable… We’ve got help for you in that department as well.
Below you will find a link to our website where you can obtain free copies of our business model test and guide to improving your business model. In five minutes or less, you should have a pretty clear picture of where your business can improve, and our guide will help you get focused on what’s most important and highest priority to improve.
Long live small business!
Long live small business owners!
Jim Smith, Founder, PERFORMIDABLE, LLC