For many family-owned businesses, the company’s finances are severely burdened by non-compensation expenses.
The daughter needs a new cell phone. The son - the newest truck. Brother - the next “offsite” in Vale.
When the company is doing well, family business owners love to share the benefits. As long as the company can afford it, why not?
The problem arises when the company runs into cash flow issues.
Perhaps it is trying to grow and needs cash to hire. Perhaps there’s a downturn and a pivot is required.
These one-off expenditures can become the norm and create a financial drag.
My recommendation is to limit family related expenses to compensation and distributions based upon profits.
- Family members should always learn to spend within their means. We teach our kids that, but do we hold our businesses accountable?
- Establish a distribution policy based upon profitability that is predictable. This could be quarterly, annual, etc. The family members become even more motivated to ensure profitability.
When the family member wants to dip in the business’ cookie jar, tell them to buy their own cookies with the money they’ve been provided.
No more one-off, unpredicted expenses.