Most people do not realize that one of the things that can kill a business is extra cash. This is not just any type of extra cash, but purposeless cash. Cash should have a specific purpose. Many businesses miss a huge opportunity to protect themselves, to invest for the future, or to celebrate by having specific fun expenses in the business.
This model actually comes from a book written by Alan Williams, Peter Jeppson, and Sanford Botkin, entitled Money Mastery. It works at a personal level but it also works at a business level where the business is paid first. Things such as savings, emergency allocations and long term investing are treated as expense accounts. When revenue is made, the savings account is paid as if it were a bill. As the business makes revenue, there is always savings.
Emotional allocation. In business, I advocate spending money on items that will provide a return on investment. However, I acknowledge there will be times that a business will need things for which there is no investment justification. Buy them with money in the emotional allocation account.
Emergency allocation. When things break, things happen, or things go wrong, an emergency allocation in your business allows you to be able to buy that piece of equipment that can save the day. This allocation allows you to be able to handle emergencies much better and not miss a beat.
Long term investing. Most small business owners are unaware that the business can buy investments. Speak to a tax accountant and you will find that there are really great synergies that exist from businesses starting other businesses.
Having an investment plan for your business is important because the business can begin owning assets. Given the right legal and tax structure (recommended by licensed professionals), you can actually begin owning assets in your business in a more tax efficient way then if you owned them personally. The liability profile on corporately-owned assets can also be managed differently. There are some limitations, but there are definitely synergies that are available to you if you are structured appropriately.
Consider today how you begin to fund these three types of financial allocations for your business. Remember that if you consider them as expense accounts that are automatically funded, it will be easier to save the money. As your business grows, you will find all three to be useful, and remember that you can always start small.
Hugh Stewart is the founder of Confident Solutions Coach. The
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