“Save a part of your income and begin now, for the man with a surplus controls circumstances and the man without a surplus is controlled by circumstances.” That was advice given by Henry Buckley, an Australian politician in the 19th century. This sentiment is just as important today for small business owners who want to control their circumstances. Here are some of the reasons why:
Growing your business debt free
Expansion, a special project, or hiring new employees takes money. It's not uncommon to borrow money to finance growth. There are problems with borrowing money:
- Interest. The lender charges interest that must be paid along with repayment of principal. While we are in a low-interest environment today, interest rates could rise in the future, making it more costly to borrow money.
- Cash flow. Typically you're required to make monthly payments of interest and principal. Say you borrow money for a special project you anticipate will generate substantial profit. You likely will be servicing the loan before you see any revenue from the project, requiring you to use other funds to repay the loan.
- Access to capital. It's not always easy, or quick, to obtain the financing you need. There may be an opportunity requiring immediate action that you could miss while waiting for a loan to close.
If you have your own savings fund, you can use it whenever, and to whatever extent, you need. You don't have to ask anyone for permission or assistance.
Business owners don't have to be reminded that the unexpected always happens—good or bad. A violent storm may wreck your premises and you have to make repairs; you may also have to work from another location until your premises are restored. A key employee may leave suddenly and you need to recruit a replacement. Your competitor across town is retiring and has offered you her business. Sure, you may have some insurance to cover repairs following a storm, but it may not be enough. You may work out a deal with your competitor to pay her over time, but you'll pay more for the deal than you would with cash.
If you have your own savings fund, you can address the unexpected, saving you anxiety and cost. You'll be able to ride out slow economic periods and optimize boom times.
Many small business owners expect that the sale of their business will generate the funds for a comfortable retirement. This notion may work for some, but should not be regarded as a general rule. You may choose to retire at a time when the economy is down and you won't reap what you'd expected. Or your business may suffer reverses, leaving you with little or nothing to sell.
If you have a qualified retirement plan, you can save for your retirement on a tax-advantaged basis. Contributions are tax deductible, effectively sheltering your current profits. And because of penalties and other rules, you can't easily use the funds before retirement, so the money will be on hand for its intended purpose: your retirement.
Savings is never easy. Many small business owners work essentially hand-to-mouth. However, a change in mindset to include savings as part of a business's budget is one way to ensure that you'll be able to control your circumstances.