Owning a business is one of the best tools for achieving financial security. But, like any tool, you have to use a business properly or you risk hurting yourself and the enterprise.
In my experience, some entrepreneurs view their businesses as a personal piggy bank. They saddle their operations with charges for everything from dinner with friends to golf with buddies to luxury cars and boats. In short, they build a lifestyle on their company’s cash flow, not their personal income.
This is a risky and shortsighted practice. Requiring your business to fund personal spending puts a strain on the company’s finances. The money diverted to family vacations and club memberships isn’t available to help the business grow – or to meet an unexpected, immediate need.
I’m shocked how many businesses don’t have an emergency fund. That’s a must-have to cover everything from an unforeseen liability to a sudden downturn in sales. I recommend X months of operating expenses in an easily accessible account. I would suggest that if you don’t have that socked away, you shouldn’t be logging your next trip to Vegas for a bachelor party as a business trip.
Owners who are particularly aggressive about using business funds for personal use might also run afoul of the tax man. Can you really make a compelling case that your family’s mountain cabin (or 35-foot motor boat) is a corporate facility necessary for staff retreats and client entertainment? Knock yourself out.
Perhaps ironically, the best way for an owner to get the most out of her business is to treat herself as an employee. Owners should pay themselves a reasonable salary based on what the business can truly afford to pay – and then live on those paychecks. As the business’ revenues grow, that salary can be increased.
Yes, if the operation has a great quarter or year, the owner may consider paying herself a bonus – assuming there is no other pressing need for that money, such as, you know, that emergency fund. An owner’s bonus should be paid as it would to an employee, in a one-time check with taxes withheld. A great quarter or year doesn’t justify hitting the company with a long-term obligation, such as a Bentley payment, that will still be on the books when things are less rosy.
The key to achieving personal financial security through business ownership is to create an enterprise that supports your lifestyle through a salary, bonuses and other profit payouts.
Shaking pennies, quarters and dollars out of the operation to meet immediate personal wants and needs makes it harder for the business to do its job of creating ongoing and potentially significant wealth.
A well-run enterprise should, over time, provide a rising level of remuneration for its owner. As it grows in value, it becomes an asset that can be sold for a handsome profit, the ultimate reward for years of hard work.