It seems to me that NZ business owners have quite an appetite for stripping cash reserves out of their businesses; perhaps taking too much too early.
I am not referring to long-established businesses who are financially secure but rather the businesses on the beginner slopes.
Generally, there are two ways of taking money out of your business – by way of either shareholder salaries or drawings. Unless you are confidently managing cashflow and have robust financial monthly reporting in place, you can mistakenly think your business has more available cash than it has. While it is relatively easy to move funds out of your business by way of drawings, it is much more difficult to find the funds to put back in!
If you own a successful business, your long game may include a combination of:
- Growing your business via vertical and horizontal integration (starting up or buying other businesses that add value to your existing one)
- Taking advantage of opportunities (including distributorships and dealerships) as they arise
- Paying off debt
- Ensuring your business assets are well maintained/replaced in a timely manner.
In fact, the more successful your business is, the more cashflow you need. It is quite common for growing businesses to experience growing pains.
Business owners often justify high levels of drawings because they feel they deserve a reward for the long hours they work and the high levels of stress they endure. This is understandable but by taking cash out of the business too early, they are increasing business risk and may well experience higher stress levels due to the following contributors:
- Pressure paying creditors on time
- Keeping up to date with taxes as they fall due (PAYE, GST, FBT, Tax)
- Covering the cost of additional staff
- Covering unplanned situations.
There may also be additional funding costs via overdrafts and more reliance on banking relationships – and that tide can turn unexpectedly.
High levels of drawings may be linked to a personal family matter or for medical care but think carefully if you are taking drawings for the ‘feel good’ factor: an expensive boat or launch, a campervan, a holiday home, overseas trips travelling first class, a Range Rover or two or anything else that takes your fancy.
In addition to the risk of running your business out of cash, my personal advice is not to flaunt your business wealth, particularly in front of staff and customers. The way in which you display your wealth to others can be problematic.
Of course, businesses need to have a presence in the market, a positive reputation and look successful but that is quite different to flaunting your wealth.
You will earn respect from your customers by being professional, sincere, consistent, and delivering an exceptional customer experience.
You will earn respect from your staff by leading by example, being sincere and looking out for them.
Your staff may well have limited opportunities in growing their wealth if they are reliant on salaries or wages.
Many may be struggling to make ends meet. What’s more, flaunting your wealth doesn’t help with the “us and them” (workers v management) syndrome that often exists within businesses. Read your audience.
If you are in the category of growing your business but at the same time looking for some form of reward for your effort, maybe consider booking regular holidays in different parts of the country and pay for your accommodation as you go (rather than having a holiday home).
Perhaps book a fishing trip on a charter boat as time permits rather than owning your own launch.
Who has bought a season pass at a ski field only to use it once! Sometimes paying more as you go is a cheaper option.
Cash is king – cash gives you options when the unexpected happens and increases your chance of riding out a storm. We all know how unexpected the Covid-19 pandemic was.
Be humble and understated and you are more likely to be respected for who you are, not what you own.
