As I mentioned earlier, I had the pleasure of attending Dave Ramsey’s EntreLeadership class in Charleston, South Carolina last week. I’m highlighting a few of the important lessons I learned during the event. One of those key lessons for me as a small business owner was finding financial peace for your business. Dave Ramsey talked about using God’s plan for our personal finances in our business lives as well. We can do this by creating a budget, keeping personal finances separate from business finances and setting aside at least 25% of monthly net profit to handle quarterly estimates for the IRS.
Dave Ramsey is obviously against any kind of debt– even in business. He believes that borrowed money magnifies mistakes and hurts or even destroys cash flow. According to Ramsey, 26 percent of the businesses started in 2009 were launched with no money. Thirty-four percent of businesses were started in 2009 with less than $5,000. However, half of small companies launched in 2009 used credit cards to finance the start of their business.
To avoid getting into debt when going into business Dave suggests renting everything from office space to equipment. He also suggests outsourcing certain tasks, buying used equipment and paying in cash. He says that often small business owners will make expensive purchases and rationalize them as needs for the business. This can ultimately cause the business to fail. An example he gave was a business owner who got a couple of jobs where a backhoe was needed. These jobs paid a few thousand dollars. Rather than continuing to rent the equipment the business owner financed new purchases that cost nearly $100,000. Then when backhoe work stopped, he had no way to pay for the equipment, which ultimately caused his business to fail.
Another great idea is to have retained earnings which is basically cash that is saved up for things like emergencies, investing or capitalizing on opportunities. Dave Ramsey suggests having 50 percent of your annual expenses in a money market type account. Ideally, if you keep your focus on serving in the marketplace and serving others you will be successful.
Next Lesson: Hiring the Right People for Your Team