Key Takeaway: The adage that it’s just business, not personal, doesn’t apply as cleanly as business owners would like. Personal spending can interfere with business decision-making. Planning for that can help ease your stress.
The view of 2008 is distant enough in our rearview mirror that most business owners (or those thinking about starting a business) have settled back in to a growing economy and healthy stock market. With this settling back can come the confidence that the way things are today is the way they will be tomorrow. The reality, however, is this current wealth effect will ebb—we just don’t know when. The one key learning to take forward from today, though, is that business success isn’t about the business; it’s about the personal.
While work motivates many, family is the reason to work. We all want to provide opportunities and a comfortable lifestyle for our families. Thus families (and particularly spouses) are in the back of business owners’ minds in the boardroom. Separating business from personal is often not possible.
If our families are always on our minds as we make decisions about our businesses, then work becomes personal. The best way to separate the equation so that personal decisions don’t derail good business decisions is to make sure the personal side is taken care of. Otherwise, personal lifestyle spending can get in the way of good business decisions.
Personal Spending Drives Business Decisions
Personal spending can get in the way of business decisions in several ways:
1. Cash reserve: When businesses hit rough patches, the optimal decision is often to not lay off the very people needed to problem-solve the way out. This may mean, though, that owners cannot take home as much money during that period. Thus, if owners have a cash reserve to cover a year’s worth of personal expenses, they can then make the decision to do what is right for the business without the pressure of taking care of their family.
2. Spending: In this same vein, business owners should be cautious about increasing lifestyle costs in good years, because slower years in business will come. It is better to smooth out personal spending so that variability in income can be accounted for; in good years, more is saved toward the cash reserve. After all, it isn’t just the big purchase of a second home that can be costly, but the ongoing maintenance, taxes, and insurance that create day-to-day pressure in a weak economy.
3. Relationships: Smoothing out spending influences spousal relationships as well. The reality is that variable spending can be hard on family members. Since they don’t always work in the business, they may have less information about the game plan when the business is struggling. I am not advocating for keeping spouses in the dark about the business. However, owners will get way more support from their spouses if they can say that the business is struggling, that they had the forethought of preparing the family for this exact issue, and that the family does not have to reduce their quality of life because of that planning.
New Business Owners
When people want to start their own business, it is often not the business expenses that hold them back (or even cause the effort to fail). It is their personal expenses. Starting a new business takes time, sometimes years. So, if personal expenses are high (often higher than the actual business expenses), they can force the owner to close the business before hitting the tipping point.
Perhaps the best way to address this is to reduce personal expenses and live that way for six to 12 months before starting the business. This will allow for the family to get used to living on less while at the same time creating a cash reserve with extra income that will go away once the new business is started.
Our economy has evolved over the last several years toward one giant subscription service. Companies have figured out that they might not get customers to make one giant purchase, but they can get them to make a small monthly purchase. Just look at services like Netflix or Amazon. The good in this approach is that we all get to experience something that we might not otherwise have been able to afford.
But the negative is that our personal spending tends to drift upward with every little decision. Before we know it, our lifestyle is comfortable and fun—and expensive. It is ironic that sometimes the joy that our lifestyles bring can become burdens in other areas of life. For the business owner, this is especially true. Dealing with personal spending now while the economy is healthy can help lead to continued happiness in years when things are rocky.
The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.