Before I opened up my own business, I spent over 10 years at a very high level of senior management for a Fortune 500 corporation. While I garnered a ton of personal and professional growth over the years, nothing can still really prepare you 100% for being the CEO of your own company. However, I did learn quite a bit about Profit and Loss statements and the importance of managing the bottom line.
If you have worked for a corporation for a few years before you start your own venture, you need to really prepare for the first time of not having a paycheck every two weeks. While you hear stories about all the personal things that your business can pay for through the company, milking your company can be a very big problem. If you start to build the mentality that the company can pay for just about anything because it is a write off, you could end up having substantial problems meeting payroll, debtors, or hitting the bottom line targets you are aiming for at a company level. So how do you avoid milking the company?
- Decide on the right level of cash reserve - Although your accountant might like the fact that interest rates are really cheap and tells you to draw down your business account to zero, I like the idea of having a cash reserve just like you would have in your personal life. I recognize that business accounts don't earn any interest, but I think as your company becomes profitable it makes sense to sacrifice some personal income to build up at least 3 to 6 months of your monthly expenses into your business cash reserve (separate from your personal cash reserve). By doing this, it will build some discipline to only draw what you really need to live on until the company has bigger and better profitability.
- Make a pro forma for the year - As hard as you try, it's going to be near impossible for you to know every single expense that will hit the business in the start up phase. There is going to be some legal, technology, or staffing bills that will pop up at some point out of the blue. However, by setting out a pro forma in the beginning of the year you can clearly make a demarcation line of which bills you will try to run through the business and which will remain personal. Remember, the more of a burden you put on the business with expenses will have a reflection on how you make some of your growth decisions. Try to make the pro forma by adding only discretionary expenses that make sense for the business in the initial stages.
- Create a check and balance system - I think it's important to have someone else work on your books besides yourself. If you don't have a set of books, you have officially uncovered your first problem. Having an outside third party or an internal partner/employee act as some sort of check and balance system is a good idea. Think about it this way. . . If you are the judge and jury on all of the financial decisions, what do you think is going to happen in a time where you need money or want to buy something for yourself?
This is part seven of a ten part series on entrepreneurship. Whether you are in the initial stages of business or your company is becoming profitable, milking your company for your own benefits can be one of the main reasons your company comes crashing to the ground. This is especially true if you allow your lifestyle to match the company growth. Then, suddenly (like we saw in real estate) the market makes a correction in your particular industry. If you avoid milking the company from the beginning, you'll have a great framework for you and employees of your organization.
Entrepreneur Series - Lesson 1 - Being Undercapitalized , Lesson 2 - Incorrectly Pricing Your Product Or Service, Lesson 3 - Know Your Role As The Owner, Lesson 4 - Avoid Rookie Mistakes, Lesson 5 - You Must Hire Professional Consultants, Lesson 6 - Poor Staffing Decisions
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS® Co-CEO and Founder oXYGen Financial, Inc. Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS.