The financial balancing act

Review the typical challenges of balancing your personal and business finances over time.

What kind of balance do you want? Are there things besides your business you want to accomplish and enjoy? If you overstretch your personal finances to support your business, or mix your personal and business finances inappropriately, you may expose yourself to personal financial liability and loss.

 A graphic that shows an old-fashioned scale tipped entirely to one side. In addition, there is a graph titled “Business Performance” with a line that shows business performance rising during the first 5 or 6 years and then dropping around year 10.

Early years risk: Overextended
In the early years you work hard to successfully establish your business, devoting time, effort, and financial resources. You may take a tiny salary, borrow against your personal credit, and find yourself working 14 hour days. The major risk is that you’ll overextend yourself financially.

A graphic that shows an old-fashioned scale tipped entirely to the other side. The “Business Performance” graph shows business performance steadily increasing until year 8 and then levels off.

Later years risk: Low $ reserves
Once your business begins to generate cash flow and become profitable, instead of you supporting your business, it begins to support you. The danger here is that you draw out too much, hampering your ability to grow and leaving reserves too low to handle challenges and downturns.

A graphic that shows an old-fashioned scale balanced equally between sides. The “Business Performance” graph shows business performance increasing indefinitely.

Balance point: ROI for time and effort
Money isn’t the only thing that you invest in your business. As your business matures, think about the time and effort you continue to invest. Consider to what extent you want to remain personally involved in your business over the long-run. Are you getting a good return on investment (ROI) of time and effort?

There are no simple answers for achieving the right balance. In the early years, consider how much financial risk you can afford to take; in the later years, quantify the amount you want to draw out to meet your wealth building goals — without putting the future of the business at risk.

See the lesson Selling or Transitioning for more about maximizing your return on investment.

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