It might be time to expand your thinking.
At the end of one of my Growth Dilemma workshops last week, I asked the participants for feedback about what they had learned. One woman commented that she learned to “manage her business more like a business, and less like a household budget.”
What did she mean?
If you think about managing a household budget, you have to match your expenses with your income. And hopefully, there is something extra at the end of every month to save and splurge on something special. While the budget can create pressure and tension, the math and process is relatively simple.
Many entrepreneurs’ choose to manage their businesses like their household budgets. They spend as they can afford to, and are reluctant to consider or make any investments that don’t meet their monthly cash flow.
“If I can’t afford it, I can’t do it – or I have to wait until I can.”
This is one approach to managing and building a business. There is nothing wrong with it, and you can be successful. It is conservative and valid.
However, for many entrepreneurs’ there is a different approach. If there are specific investments that you want to make which you think will help you achieve your objectives faster, you can choose to raise equity or borrow money to make these investments faster.
Let’s take an example. Let’s say you have a business with a $1,000,000 of sales and $100,000 of profit that you take home as a salary.
If you think with an investment of $100,000 you grow your sales to $1,500,000 and your profit to $200,000.
If you follow the “If I can’t afford it, I can’t do it” approach, you will never make this investment.
If you choose to borrow the money through the SBA, you would have a monthly payment of approximately $1,100 a month for ten years.
If the investment fails miserably, you will lose approximately 13 percent of your income to debt service.
If the investment works, you will double your profits, and likely pay off your debt in about two years.
This is using leverage to grow your business.
Leverage doesn’t work in managing the household budget, but it does when building a business.
So how are you managing your growth plans?