Test Your Financial Fitness
Before Loren Comitor started his own business, 22 years ago, he was earning the kind of salary and benefits most people only dream about. "Overnight, I went from a very comfortable corporate blanket to a parachute jump of survival. And the question was, would I manage to get the chute open in time?"
Today Comitor's advertising business, CCM&A, in Northbrook, Ill., supports a comfortable life for his family of four. But the sacrifices Comitor made while launching his company took their toll on his personal finances: "I haven't even begun saving for my kids' college education. I'm living well, but sometimes it doesn't seem like much to show for all those years of work building my own business."
Comitor isn't unusual. The great irony for many entrepreneurs is that building value in their companies requires such sacrifices that their personal financial picture suffers. Notes Roy Ballentine, a fee-only financial adviser based in Wolfeboro, N.H.: "It's in an entrepreneur's best interest to diversify personal assets outside the company when possible. Every year, I've watched one or two business owners go from having an enormous personal net worth--all tied up in their companies--to losing almost everything, because their businesses hit a glitch and creditors were able to seize almost everything."
How vulnerable are you and your family? Take Inc.'s Mind Your Own Money Quiz to find out.
How Well Do You Mind Your Own Money?
Instructions: For each question, circle as many answers as apply. (If all the statements are true for you, circle them all.) Then add 5 points for each answer chosen. If none of the choices fit you, give yourself zero points for that question.
1. Which of these statements are essentially true for you?
a. I haven't balanced my personal checkbook in years.
b. I plan to start saving for retirement...when I'm closer to retiring.
c. My kid's education? My only hope is to take the company public before my toddler gets to college.
d. I'd think about estate planning if I weren't so busy running my company. (Add 5 bonus points if the corollary also applies: I'd buy life insurance if I weren't so busy running my company.)
2. When I think about my investments outside my business, I realize that I need...
a. More liquidity.
b. A good financial adviser.
c. A lottery grand prize.
d. To make some.
3. How healthy is your paycheck?
a. It's almost back to what I earned before I started the company.
b. Not great, but it's steady.
c. I've skipped more paychecks this year than I want to count.
d. Paycheck? What's that?
4. How often do you reach for your personal credit card?
a. Whenever my company runs out of cash.
b. Constantly. My personal credit keeps me afloat while my company grows.
c. Whenever I haven't maxed out my credit limits.
d. Never. I can't qualify for credit.
5. How do you feel about your or your family's financial condition?
a. Terrified. How did things get this bad, this quickly?
b. Supremely confident. After all, my company's going to be the next McDonald's--someday.
c. Too busy to feel anything. I've got my company to take care of.
d. Completely confused.
How Am I Doing?
If you scored 10 points or fewer, congratulations! Your personal bottom line is in great shape, so you're free to concentrate on your business. With 15 to 25 points, you're doing reasonably well. But if you scored 30 to 50, it's time to reorder your priorities. Try spending 30 minutes to an hour each week focusing on your finances rather than your company's. If you racked up more than 50 points, it's time for emergency care. Consider a visit to a fee-only financial planner who works with business owners. Meanwhile, take to heart the following guidelines, designed specifically for entrepreneurs.
1. Minimize personal risk. Mary Malgoire, a fee-only financial planner based in Bethesda, Md., emphasizes that "business owners need to realize that there's a difference between taking risks with their companies and taking risks with their families' financial future." One step: set up an emergency fund with enough cash to cover three to six months' worth of family expenses. Safeguard the account as carefully as your company's cash--especially if you have children.
2. Avoid debt. Many early-stage entrepreneurs rely on credit-card financing. However, Ken Thuerbach, chief executive of Alpine Log Homes, in Victor, Mont., is convinced that personal and corporate debt undermines far too many small businesses. "When I started out, I drove an old cop car that I bought for $200," he says. "I lived so frugally you wouldn't believe it. But that freed me from a major downside risk while my company was trying to grow."
3. Pay yourself a decent salary. Salary pitfalls can take many different forms for business owners: not paying yourself anything; not paying yourself enough; not paying yourself regularly; not keeping a record of paychecks you plow back into your company. All wreak havoc on personal finances. Financial planner Roy Ballentine urges entrepreneurs to answer three questions: What salary are you worth in the open market? How long are you willing to forgo earning it? And can you foresee your company's ability to pay you that wage, as well as an adequate return on investment for your capital? "If not, you've got to set up a business plan to get your company to that point or reconsider the business's prospects," he says.
4. Get liquid. One method is to pay yourself an adequate salary and invest it in mutual funds and other diversified investments. Michael Frost hit on another solution after switching his company's bank two years ago. "My new banker was able to lend me money against some of my corporate stock and then provide some guidance about appropriate, diversified investments," says Frost, who is president of TechWorks, an Austin company that sells personal-computer memory upgrades. "That gave me the opportunity to leverage some of my equity value into other, more liquid investments."