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Pinnacle Resource Center TOO close to your business? If you are like the many small business owners I work with, you know your business inside and out. You have to because, often times, you are the business. You wear all kinds of hats. Some fit better than others, but you don them all at some point. Today you're driving sales, while tomorrow you will be caught in operations. And without you? The business is done, finished, and caput. When it comes to finances, I believe there is wisdom in creating separation between your personal affairs and those of the business. More importantly, I believe you'll prosper by doing so. Creating a little bit of separation will potentially allow you to maximize business performance and improve the bottom line as well as improve your own personal net worth. Potential problem with combining finances When your personal financial matters are woven tightly into the books of the business, it becomes difficult to analyze how the business is actually performing. If the line between owner and business is unclear, the results posted by the company can be skewed by merging your personal affairs, making it difficult to objectively evaluate performance. When you carve yourself out of the business, you are forced to look at what remains. Are profit margins appropriate for your industry? Is the business generating cash at levels equal to your peers? And, do you have the capital you need to remain competitive? The same murkiness exists in your personal finances when they are too intertwined with the business. I believe you will benefit tremendously by looking at your personal financial picture independent of the business. In too many cases, I see the value of the business listed as the only major asset held by the owner and, quite alarmingly, the only retirement asset available. You hope the business will serve as a source of liquidity down the road and provide for you into retirement, but you should take care of yourself along the way. Ideas for optimum performance First, pay yourself a salary. I highly recommend paying yourself a salary as opposed to taking draws only when you need money. I believe compensating yourself in the form of a salary creates discipline that is necessary to maximize your personal and business worth. On the business side, the company recognizes a fixed expense each month allowing you to better analyze month-to-month results. For you personally, you take home a consistent amount of money to address your personal needs. More importantly, you have a consistent income that you can use to begin building wealth outside of your business. Second, get to know your bookkeeper. More specifically, get to know your books. Invest some time understanding your financial statements. Does the balance sheet reflect strength? Is the income statement generating positive earnings? Conduct this review while leaving out your own compensation. How does it look? Is it in line with your peers? If you could earn more, would you use the extra money for growth, more employee benefits, etc.? Scrutinizing cash flow will undoubtedly lead to improvements in your business and financial operations and, who knows, it might lead you to a more competitive position in your industry by lowering costs, improving service, and strengthening client relations. Third, draft your personal financial statement. Like your business balance sheet, a personal financial statement is a listing all assets and liabilities that make up your net worth position. Again, does it look good? Now take out that big number you've included as the value of your company. How does it look now? By asking you to do this, I am not saying that your company is worthless. Certainly, it has value, but it is not easily convertible into cash. Omitting this figure leaves you with an objective view of your net worth independent of the business. The personal financial statement will help you answer key questions about financial liquidity, college savings, retirement planning, etc. You've done well.you might do better I see small business owners pouring their heart and soul into their business every day, taking risks and accepting challenges many would choose to avoid. I salute them and you. You represent what is great about our society and you fuel our country's economic engine. You work hard, and with a little more discipline in how you manage your personal and business finances, you'll put yourself on a path to greater prosperity. So let's get going. And don't forget your hat. |
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