Having $10,000 in your checking account does not make you a successful business person. Expanding a business is a worthwhile endeavor, but is that $10,000 really available to pursue an expansion program?
In a small business the financial statement of the firm is not the only consideration of how to spend accumulated funds. If, for example, the owner borrowed money to start the business and still has a personal liability for that debt, then the business also has that same debt. A statement, “My business is doing just great but I am having some financial troubles” is a contradiction.
When doing a financial analysis of a small business I look first at the financial status of the owner. What is the owner’s net worth? What personal/family expenses are possible in the next five years? Is there a family reserve account? Is there an adequate retirement account? I ask them to fill out my “Be Prepared Book” which allows for a complete evaluation of their personal financial status.
Then, and only then can a comprehensive financial analysis be made for the business. If the business budget and future projections can’t meet the owners financial needs, then changes have to be made and the business scope re-evaluated.
A small business entity cannot be termed successful if the owner goes deeper in debt every month.
Yes, a small business needs time to establish itself and it may have to rely on the funds invested by the owner. The caveat to this thought process requires the owner to have enough money to survive while the business is growing.
Most small business owners that I have visited seldom take into consideration their own personal finances as part of the business. When I ask for a budget forecast, I often get a few numbers scratched on the back of a napkin showing the overly optimistic potential cash flow.
Although I coach the entire “growing a business process”, as a Certified Financial Planner, I have to look at the numbers side of the venture. If an annual budget is prepared and broken down into a realistic, monthly income and expense projection, a measuring stick is now available to measure progress and to make changes as needed.
If you don’t have a family/business budget for this coming year, stop whatever you are doing and put together this measuring stick for true business success.
Good leaders must also lead themselves….. Nick J. Petra CFP
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