It seems like no matter where you look online, there are videos or articles of entrepreneurs telling you how you can create unimaginable wealth from a business venture. The dream is sold as an escape from the rat race; and it’s implied that income will just continue to flow in forever. But that’s not entirely true.
What many new entrepreneurs aren’t aware of is this: you need to put measures in place to preserve your wealth. As easy as it might be to gain wealth, if managed poorly, wealth will disappear just as quickly. There’s a long list of entrepreneurs who have lost everything.
Here are four measures every entrepreneur can put in place to preserve their businesses income and wealth.
1. Micro-manage your cashflow
One of the biggest reasons successful businesses go under is because they accumulate too much debt and a high negative cashflow. It gets to the point where founders can no longer manage the debt and they spiral out of control – to the point where administrators are called in to fold and liquidate the business.
It’s essential to maintain a cashflow positive business and accumulate debt from assets that contribute towards positive equity growth or positive cashflow. It’s also important to manage financial risk and avoid accumulating more debt than you can repay.
2. Avoid the threat of business downtime
Productivity is critical to business progression and development. There’s the threat of downtime, which can cost your business thousands or potentially millions of dollars in a short time period. The financial risk can be mitigated with business interruption insurance, which will cover costs associated with any downtime in a business.
3. Forecast your business expenses
Unforeseen circumstances can expose your business to too much risk. If you fail to account for tax bills, government rates or levies, banking fees or other expenses it can have a severe impact on your business cashflow and chances of survival. Mitigate any risk that can put the business in financial distress. This can include legal actions or employee acquisitions.
4. Ensure business development is ongoing
Never get too comfortable with the rate of business development and sales. Always be on the lookout to develop new streams of income, which will hedge the business against any future financial risk.
5. Know the difference between asset wealth and being cash-rich
There are many specialists that might assess your wealth status and, on paper, you are wealthy with owned assets that continue to rise in value. However, it is more important to have cash; not just assets with on-paper value.
Paper assets such as stocks and real estate are valued in a way to leverage credit or that can be sold for a higher value in the future, but the cash will remain within the asset. The equity value is good on paper, but you won’t benefit until you are able to unlock it and use the cash tied up within the asset.
On the other hand, if you own income generating assets such as businesses or property that provide income as a result of holding the asset that is favorable.
Most entrepreneurs tell tales of their challenges on the way to the top. You don’t want success to quickly turn into your downfall because of a few poor business decisions or bad judgement calls. Be well advised and protect the longevity of your entrepreneurial success.
This article has been edited.
Andrew Payne is the Managing Director of McKenzie Ross, a business insurance brokerage firm based in Melbourne, Australia. He specializes in delivering solutions to professional industry associations in the areas of hospitality, print finishing, retail and construction. He recognizes a shortage of broking services in the medium-sized business sector that are taken for granted in the corporate space. Connect with @mckenzierossib on Twitter.