Too often we see business owners with nearly their entire net worth tied up in their businesses. It make sense, considering most pour their heart and soul into getting their businesses off the ground—and often stake every penny they have to try to make it a success. And once the business begins to prosper, these owners will often take on additional debt to fund future growth prospects.
That’s great when everything goes according to plan, but what happens during the worst recession since the Great Depression? Just as we caution our executive clients not to have overly concentrated positions in their employer’s stock, business owners should diversify their assets beyond their own business interests.
Economic forces beyond the business owner’s control can wreak havoc on the bottom line, no matter how successful the company. So what can business owners do to protect themselves from unforeseen financial circumstances?
First, don’t tie up your entire net worth in your business. Maintain a diversified portfolio of cash, stocks, bonds, and commodities, and add to it when cash flow allows. In addition to outside investments, establishing a retirement plan through the business not only saves on taxes but builds personal wealth as well. Second, be careful how much debt you take on. Growth is a wonderful thing, but large loan payments when income drops can be a catastrophic formula. Third, keep an eye on your customer’s financial condition. Generating sales is obviously important, but getting paid keeps you in business. Watch for higher receivables and collection expenses. Fourth, stay lean and mean during challenging times like the present. Just as families have tightened their spending belts of late, review expenses to see where savings can be wrought. And finally, consider diversifying your product line or service offering. Many landscapers stay busy in the winter by acquiring snow-plowing contracts, so explore opportunities that may co-exist with your main line of business and strengthen your company’s overall financial condition.
President and Founder
Ameriway Financial Services
Want to improve the way you run your business? Entrepreneurs, academics, and consultants from diverse industries offer practical advice on a variety of topics each business day.
To submit a tip for consideration, first check our archive of previous tips to make sure you're not repeating a tip someone has already contributed. Then send the tip to Small Business channel contributor Michelle Dammon Loyalka. Because of the volume of material she receives, she may not respond to each individual.