Too many small business owners don’t understand the difference between personal and business money. They don’t “get it” to the point of undermining their success. Countless people have driven their thriving business into bankruptcy or severely limited its growth.
They have the same basic mindset – my business money is just an extension of my personal money. While there are a variety of ways this thinking affects their actions there are 2 behaviors which are the most common.
Run everything through the business
They believe the business can and should absorb the costs of personal items (i.e. kid’s college tuition, boats, cars for family not working in the company, vacations). But, that’s what personal money – salaries, savings accounts and loans – should be used for.
They use the company account as a bank that provides interest free loans, which never get paid back. Putting aside the tax consequences if they get caught, the bottom line is that most small companies can’t support the cost (overhead) of personal items.
Money isn’t unlimited and too often the business starts to suffer. The money to buy a needed piece of machinery, hire more personnel or a new service truck is tied up in the home basement remodel, a family country club membership and a new motorcycle.
Use the company as an ATM
Another way of using business money as personal money is raiding the coffers. They may or may not run any personal items through the books, but believe the cash assets are fair game. They unofficially take money out in addition to officially paying themselves a salary and bonuses.
Some owners take “just a little” cash. One took $30 a day out of petty cash for pocket money. He was shocked when the accountant pointed out he was getting a $7,500 bump in salary ($30 x 5 days a week x 50 weeks a year). A raise he hadn’t formally given himself, because the company couldn’t afford it. Others take larger amounts, sometimes hundreds or thousands.
But, regardless of how the cash is siphoned off it takes money to make money and if the business doesn’t have enough operating capital, at best, it becomes impossible to grow it. At worst, the financial hole is dug too deep; it can’t survive the drain and folds.
No matter how it’s done using the business as a personal bank is short-sighted and self-defeating. Everyone knows, or should know, the story of killing the goose who laid the golden eggs, and yet many don’t learn from it. It’s unfortunate, because when used properly business money can be parlayed into bigger profits, which means a higher salary and increased bonuses.
