A pen, wine and money

13 April 2021

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Why you might not know what to do with money

You pick up a pen and you instantly know what it’s for. You pick up a glass of wine and you know what do with it (well, we do anyway…). Money on the other hand, isn’t quite so clear cut.

The obvious answer on what money is for is spending. You earn a dollar; you spend a dollar. The obvious answer isn’t quite the full picture though.

Spending

Yes, earn a dollar; spend a dollar.

Money can buy comfort. It can keep staff satisfied in your business; it can make home a little easier. It isn’t going to buy happiness, but that’s a whole other topic…

Generating

Then, and this is more important, money can generate money. Investing right, no surprises or rocket science in this.

The trickier part in this is where you invest. In a business context, the most common mistake we see is people not treating their business as a business. They treat it as an extension of themselves.

The most successful business owners we work with look at their business as an investment. They pay themselves proper salaries for their work. Their business then accumulates funds across the year. The business then makes a decision on paying dividends, alongside reinvesting in the business.

If dividends are paid, then the business owner has a choice. Do we invest the income outside the business (for example into shares or property), or do we reinvest in the business?

If any funds are reinvested in the business, then the business owner should be thinking about their business in the same way the bank would. If the bank was looking at lending or investing into your business, would they? If they won’t invest, then should you?

That’s not to say you shouldn’t – you know your business better than the bank does. Simply, evaluate your business as if you were a bank, or an external investor. And then make a decision from that perspective. Don’t just dump cash in for the sake of it.

Ultimately, generating money from money is the aim – just make sure you make rational investment decisions.

Protecting

Then, money is about protecting what you’ve got. Part of this is insurance, part of this is self-insurance.

To us, self-insuring isn’t putting money into a savings account instead of paying an insurance premium. It’s about deliberately spending money on building your business to make it more resilient.

Two clients of ours had heart attacks within three weeks of each other. One received a significant insurance pay-out which he used to keep his business afloat while he was off work. The other had no insurance.

The business with the pay-out is now struggling. The money was used to hire replacement staff while he was off, to fire fight and basically just to keep things afloat.

The business without the pay-out is now doing very well. The first couple of weeks were a balancing act, but as the business settled things took off. The business owner had developed robust internal processes. Staff were able to step up. Sales kept trucking on. All-in-all the business hardly skipped a beat.

The second business had spent money protecting itself with skilled staff and strong processes. Their insurance wasn’t just a lump sum of cash turning up – it was their choice to spend money building strength in their business.

So, where will you put your money?

Use it for spending, for generating, or for protecting. It’s up to you. Wherever it is though, make sure you’ve got a plan around your financial future and your business.

We help a small number of businesses create their plans with our Business Advisory services (if you missed it – Xero recognised our advisory work as the best in the country). We’ve currently got space for two more advisory customers, so if you’d like to find out if you could be a fit then get in touch.

 

 

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for more help feel free to reach out. Get in touch with Eugenie Jones