The more you make the more you spend.
In the past 28 years I have sold millions and millions of dollars of products and services. I have been on compensation programs that included base salary plus a small commission to the 100% commission and everything in between. If you are like me, the more I tend to make the more I tend to spend. The $200 weekends at home can turn into $5,000 family ski trips to Colorado. The one mistake I made early in my business and I see in my office every week is that people take too much money out of their small businesses. Small business owners tend to ratchet up their take home pay as business increases or they keep taking the same take home pay when the business is hit with decreases in sales and profits such as what many of us just experienced during the last two years.
My question to you would be, how would you feel as a small business owner if you had three to six months of business expenses set aside? There is no doubt that I am a big Dave Ramsey junkie, but when I changed the business models for both of our companies to include a percentage of income to be set aside for retained earnings, my stress level decreased 50%. I say 50% because I still work in the real world and things are changing all the time with end users, principles, distributors and clients. I now have a sense of peace that we will be OK if there is another downturn in the economy or if something goes wrong with one of the company cars or if we are fired by a client. There is no doubt it will hurt but having a fully funded retained earnings account gives me the security to take my time to make a good sound financial decision for the company instead of a move of desperation driven my the fear of failure.
The hardest part about establishing a retained earnings account is the habit of spending every dollar that comes in the door on your business or yourself. There is always something that you may need or want for the business and we all can do the math and justify the expense. As we all know, most of it is tax deductible and we can write it off (touchy topic for another blogg). We need to emotionally embrace the benefit of having the reserved funds account and start to set aside a percentage of each months profits for the account. You don’t have to do it all at once but think about building it up to three months expenses over a year to 18 months. The peace of mind and the reduced stress is an awesome experience. The stress we live under running small businesses is tremendous and anything we can do to eliminate it can extend our lives and the life of our small business. Set a goal and make this a part of your business model.