As a small business owner, there are 2 distinct types of businesses you can run. These are a Lifestyle business, typically categorised by you taking out the profits each year, earning less but having a better work/life balance and the business growing organically at a slower rate, and a Growth business, categorised by growing as fast as possible and looking to get investment or sell up completely at a point in time.
The type of business you want to run is completely unique to your personal circumstances, the stage of life you’re at, previous experiences etc. Therefore one isn’t better than the other!
However, if you’re running (or want to run) a Growth business, you need to be acutely aware that the business isn’t just there for you to treat as a personal piggy bank! You need to be building value in the business, and the actions of you as the business owner can affect this.
Here’s a few things you need to think about doing running a Growth business:
- Get to a level of personal income that you’re comfortable with i.e. you can live a comfortable personal life. Don’t take more from the business than you need. Leaving profits in the business will ultimately increase the value of your company Balance Sheet – the only publicly filed financial document for a small business.
- Keep Personal Costs personal! So often business owners think it’s ok to pay for personal costs through their business. However, this causes a number of issues for the business. Firstly, it reduces the business cash balance. Again, Cash Reserves are shown on the company Balance Sheet so are seen publicly each year. Secondly, making personal payments from your business can cause your Directors Loan Account to become overdrawn, meaning that you owe the money back to the business. Depending on the size of your loan account there could also be tax implications.
- Consider paying back drawings before your company year end. Firstly, find out when your company accounting year end is if you don’t already know! Then, ask your accountant to advise on your directors loan situation. You may have taken loans from your company during the year, paid personal costs through the business as described above, or taken more in Dividends than you need. Paying this money back into the business before your year end will mean that you show more cash in the business AND if repaying dividends back to the business you’ll also show more Retained Profits…both increasing the health of the business to the public eye.
There’s a fine balance between keeping your personal costs down, and showing a healthier set of company accounts. You need to be aware of the implications of the decisions you as the business owner are having on the present and future value of your business.
