by Ruth King, president of Business Ventures Corporation and the author of “Profit or Wealth?: Simple Rules for Sustainable Business Growth”
A colleague was helping a business owner look for funding for his business. He introduced him to a potential investor at lunch. The next day the investor called my colleague and told him that the person was nice but he would never invest in his business. My colleague asked why. The investor said that he had the “Mercedes Benz syndrome”.
“What’s that?” asked my colleague. The investor explained that during the conversation at lunch he found out that this person was funding a $2200 Porsche lease through the business. He appeared interested in having the business pay for his personal lifestyle. The investor explained to my colleague that his money was not going to pay for a car lease. His investments were supposed to help grow the business; not the owner’s personal “finer things of life”.
He went on to explain that he called this the “Mercedes Benz syndrome” where the business pays for unnecessary personal assets, i.e. the owner’s “Mercedes Benz”. Investment that is supposed to go towards the business’ needs goes towards the owner’s personal needs.
It struck me that a lot of business owners and other people do this too. I know some. You probably know some. These are the people who, when they get a large influx of cash or have a lot of cash saved from their business proceeds, spend it rather than keep it in that savings account.
One of my clients never thought about the consequences of spending money in his savings account. He had a great year and felt he deserved a reward. He went to “The Big Boys Toy Store.”
When I found out what he had done, I firmly asked him whether he knew what he had really done. By taking that money out of the savings account for a toy rather than a business need, he took away his ability to sleep better at night and some of his retirement funds. He was stunned as he realized what he had done. He got it.
The next year, when he had another very profitable year, I asked him whether he was going to the “Big Boys Toy Store” again. He said, “No. I gave my stupid gene to my competitors.”
It took three years to replace the money in that savings account. He learned his lesson.
Don’t get me wrong. There is absolutely nothing wrong with enjoying the fruits of your labor. However, you can’t do it at the expense of your business. You have to save cash for the downturns. You have to save “for a rainy day.” Most businesses have cash flow emergencies from time to time.
So how do you avoid the Mercedes Benz syndrome? You can actually save relatively painlessly. Save 1% of every check that comes in the door. That means if your deposits for the week total $1,000 you transfer $10 into a savings account. And, if some of your deposits are through credit card payments, you need to put 1% of those funds away too.
For a $1,000 deposit, the $10 doesn’t seem like much. And, you can use the other $990 to cover business expenses.
The savings do build as your business grows. Then, when the amount in that account reaches the maximum Federally Insured Amount, transfer some to another bank or financial institution where these funds can remain fairly liquid.
This savings plan is not difficult to do. However, it takes discipline to do it. Whenever you get revenue in the door, you have to have the discipline to transfer the 1% to a savings account. Some companies do it when they receive the funds. Others do it once a week. It’s your choice. Just make sure it gets done.
How much should you save? This is totally up to you. It depends on how much emergency cash you think you need. Many businesses have lines of credit. If you have a line of credit and it isn’t used, that can be a form of emergency cash.
However, even with that safety net, many company owners like to have at least two to three months overhead expenses saved. Their reasoning is that if nothing came in the door, then they could at least pay their people (or their living expenses) for a reasonable time. You’ll need some savings that are fairly liquid, i.e. you can turn them into cash quickly. Other savings could be more long term which probably will earn more interest.
Hopefully you don’t have the “Mercedes Benz syndrome”. Good cash management and savings will help prevent cash emergencies.
Ruth King is president of Business Ventures Corporation and the author of “Profit or Wealth?: Simple Rules for Sustainable Business Growth” and four other award-winning books. Well-known as “The Profitability Master”, Ruth has a passion for helping small business grow profits and wealth. She began training on the Internet in 1998 and began the first television-like broadcasting in 2002, launching her own TV channel – www.hvacchannel.tv.