Helping you plan, start and grow your business
Long-Term Security: Manage Your Profit Distributions
What is one of the top reasons for business failure? The poor financial management of owners who use their small businesses as personal savings accounts.
One of the most important rules of a business startup is to open a dedicated business bank account. Deposit an initial sum that serves as a capital account. The goal is to earn enough cash to pay back any business expenses. In the meantime, the capital account serves as a cushion during periods of poor cash flow.
Here are two critical actions to avoid:
1) Do not take money out of the business that you will have to repay, even if you think of it as only being a loan. Many, many businesses have failed because there was not enough money left to pay the bills after owners took ill-conceived distributions.
2) Do not take money out without informing your business partners. If you do not tell them, it could be perceived as theft, and it would be within their rights to notify authorities. That is a path you do not want to travel!
In addition, be sure to understand the specific legal requirements for your particular form of business (e.g., sole proprietorship, partnership, LLC, and S-Corp).
Discipline yourself to handle business income appropriately, and avoid the hassle and embarrassment of poor fiscal decisions!
“Common Causes of Business Failure” is included in my book, Are You Ready to Start Your Own Business? A Sanity Check for Those Who Dream of Self Employment. Work to avoid them!
Until we meet again,
The Entrepreneur’s Friend