A while ago I wrote a blog called ‘your business is not your baby’ where I talked about the importance of treating your business as a separate entity, not as an extension of your family or personal life.
Today in one of the rich and frank Master Moves group discussions, this important distinction came up again.
The conversation came about as a business owner shared that they had been ‘stripping’ money out of the business to fund other projects. Another business owner agreed they had done the same. Which was all well and good until an external factor impacted on revenues, causing an instant and significant drop of income. Then the lack of cash reserves in the business became a problem.
Suddenly he couldn’t pay his contractors on time, and became stressed about their well being as like all business owners, we are always conscious of our responsibility to those who rely on us to make good decisions so they can feed their families and pay their mortgages.
So is it wrong to take the cash out of your business as you go?
My answer is a resounding ‘no’ – it’s not only not wrong but it is important that you do so. Why would you wait until the end and hope you get your ROI on all your efforts from a sale? When you can be taking money out as you go and investing it elsewhere, thereby growing your wealth outside of the business at the same time you are growing the business.
But it is critical to do it strategically and in a way that makes your relationship with the business very clear and works for the business as well as you.
Here’s what I shared about how my business was set up and how I learned to have an appropriate relationship with it.
Your business is a separate financial entity and as such needs to stand on its own two feet. It needs to raise it’s own finance when needed.
It has a responsibility to make enough profit to be able to pay dividends to its shareholders, to give them a fair return on their investment.
It is the job of the CEO to ensure the business performs well for its customers, its staff, its community and also its shareholders.
As the owner, you are the shareholder.
But as an owner operator working in the business you are also the CEO.
It’s good to remember you have two hats – The CEO and the shareholder.
As a shareholder you have every right to expect a dividend paid out of profits
But only if as a CEO you have met the targets and expectations of the business to ensure there is enough capital to do three things:
- Allocate a reasonable % of profits to be working capital left in the business for growth and risk management
- Allocate a % of profits for profit share/bonus for the key people who have helped achieve the profit
- Allocate a % of profits to be declared as dividend pay out to the shareholders
This is how my business was set up and it worked really well. I was on a salary paying PAYE, that was all I took out of the business until profits were finalised. Then I would receive the agreed % of profits after a capital allocation was made to fund growth and have reserves for tough times, and after key staff had been given a profit share bonus.
The key to win/win
The key really is to always view your business as a separate entity – your job working inside the business is to make sure it’s financially successful so that it can pay you a return that you can use outside of the business.
Take money out yes. But leave enough money in to feed the business when it needs it… and this my friends is a win/win for you and your business.
I hope that makes sense!
PS. Conversations like this happen all the time in the Master Moves community. To find out how to join us, hit reply to this email and I’ll fill you in!
Master Moves is a powerful group programme for business owners who really don’t want to keep playing the game alone. Find out more here.