A healthy business should have a healthy relationship with its banker. But how healthy does your business need to be?
Bankers have specific ratios and assessments they use to determine a business’s credit worthiness. It is worthwhile to educate yourself on how bankers determine these ratios for your specific industry and business.
Once you get to the place where your business is healthy and your banker is happy, there is an opportunity to take future profits for yourself. Let’s consider the costs and benefits of two options:
Option 1: – Leave the future profits in the business
Advantage – Pay down debt, reduce interest costs and increase business value.
Disadvantage – Personal investment assets are lower.
There is another common situation which occurs when leaving the extra cash in the business – the cash seems to disappear into the business activities.
Option 2: – Take some profits out and invest them personally or pay down personal debt.
Advantage – Pay personal debt, reduce personal interest costs and increase personal wealth outside the business.
Disadvantage – Business keeps existing leverage and pays higher interest costs.
The extra cash withdrawal can disappear out of your personal bank account too, but not if you invest it for the long term.
I have been recommending Option 2 to my small business clients for a long time. It works. Over time you will build substantial personal investments outside of the business. The other, sometimes surprising benefit is that the business will usually not be worse off.
In the simplest of terms, once your business is healthy, stash some cash every year, and the business will adjust and still grow on its own.
Why not try it?