It’s a source you and most others know about, but it’s so obvious that it’s quite often overlooked by so many small-business owners.
The secret is this. Avoid whenever possible to need any third-party funding source. That’s right. Do not ever have to seek third-party funding.
How can this be so? It’s easy. “Just” make a profit, and retain as much of that profit as possible in the business. Retained profits are also referred to as retained earnings.
Here are two simple, imaginary tales of different small-business owners:
First comes Annie O’Klee. Annie started a service business, and led a very conservative, frugal lifestyle. After drawing enough each month to live on and support herself and her three children, and continuing to drive her ten-year old VW Beetle, she managed to set aside her $2,000 per month profit, and leave the money in the bank. After two years she had a balance of $48,000.
Second comes Bill T. Kidde. Bill started a service business, and seeing that he was making money, he early on became very impressed with his brilliance in running a business. He bought a Lincoln SUV, four Ski-doos for himself, his wife, and two kids, took several weeks-long ocean cruises, and was enjoying life to the hilt.
Each month, after paying himself with sufficient draws to support his lifestyle, he had no money in the bank. He had retained no earnings.
Then, after a couple of years, his largest customer defaulted on a $20,000 contract. Oops! Now Bill was in a pickle and found he needed to get some money from somebody, somehow. He needed third-party funding. He did not have, like Annie, money in the bank.
These two tales show the difference to a business owner in not retaining (or spending unnecessarily), the profits from the business.
Don’t Shoot Yourself in the Foot
Granted, using third-party funding is often necessary in order to acquire new assets, or to fund working capital for a growth spurt, or for other legitimate reasons, are legitimate concerns. But needing said funding for unnecessary reasons, for avoidable reasons, is shooting oneself in the foot.