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Jeopardising your future by taking too much out of your business?

A worrying trend we've encountered recently is that cash flow problems facing some SMEs are arising because owners are taking more cash out of the business than the business can afford. Why do some owners apparently act so rashly? To find out how you can avoid falling into the same trap.

A key problem for many SME businesses is managing their cash flow, reports Bevan Metcalf from The FD Group. Too many SME's do not have the necessary financial skills in-house to prepare financial plans and cash forecasts which can be vital tools in the survival and prosperity of a business.

Where a business is growing fast or there has been a down turn in sales, it can come as a big shock to the owner to discover that there is not enough cash available to meet the day-to-day requirements of the business.

The old adage that profit is important but cash is king should not be forgotten. Many profitable businesses have gone to the wall because they forgot this premise!

A worrying trend that The FD Group has encountered recently is that cash flow problems facing some SME's are arising because the owner is taking more cash out of the business than the business can afford. So why are some owners apparently acting so rashly?

A key reason is that they are funding a lifestyle that the business cannot support, perhaps due to a decline in profit or maybe due to additional investment in expanding the business. Some owners are not prepared to adapt their lifestyle in terms of holidays, cars, house etc to fit their budget as this could be interpreted by friends and family (and indeed by the SME owner himself) as failure.

Some owners do not even appreciate how much their lifestyle is costing them. The FD Group has helped a number of business owners facing these difficult problems to adapt. A common response we hear a lot from owners is that they didn't know who to turn to for help and support when the going got tricky!

Another reason why some owners are taking too much out of the business is to finance an alternative business opportunity. This is often done at the expense of the principal business and can have dire consequences.

Bevan Metcalf says - "One business owner I met recently had taken significant money out of his Company to finance the development of a property portfolio with funds being diverted to refurbishing a property. This placed pressure on the main business and creditors such as Customs and the Inland Revenue weren't being paid as a consequence.

After completing the refurbishment the property was placed on the market but didn't sell. In the end the business failed and was wound up by creditors because there wasn't enough cash in the business to meet existing commitments."

So what key lessons can business owners take on board to make sure they don't end up in a similar situation?

1. Remember cash is king!
2. When investing in growing the business make sure the financial impact of your plans are fully understood.
3. Cash flow forecasts, ideally on a 6-12 month basis, are extremely important.
4. Look at your lifestyle and plan changes early if the business can no longer afford to support it.
5. If you want to invest in other business opportunities, understand the financial implications before you rush in. You are not only diverting funds, but also your time and focus from your main business.
6. Get experts in to help if you feel you are trading insolvently. Remember as a sole trader you can lose everything including your home. If you are a director then you may be breaking the law.
7. Planning is essential in business today. If you don't plan you plan to fail!

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