Small Business owners using their companies as personal banks is a common practice that has lead to thousands (at the very least) of them closing.  Some owners didn’t understand the damage they were doing to their companies; while others understood, but didn’t care.  Either way, too many people have driven thriving concerns into bankruptcy at worst or severely limited its growth at best.

These owners share the same misunderstanding – they don’t think there’s a difference between personal and business Money.  They believe the business’s money is an extension of their personal money, that it’s all their money.  There are a variety of ways this thinking affects their actions, but here are the 2 most common and destructive.

Run personal expenditures through the company’s books

Many owners believe a benefit of having a business is that it can and should absorb the costs of personal items (i.e. airplanes, horses, kid’s college tuition, motorcycles, the family’s country club membership).  Too often business money is seen as “free” money.  They use it to provide loans to themselves and family, which they aren’t responsible for paying back.

But that’s what personal money should be used for.  If an owner, or his family, has to be personally responsible for personal expenses, the chances are they’ll think and act differently about them.  When the business is responsible for them, it’s out of sight out of mind.

One man was shocked to discover his business was paying for 5 family member’s cars.  His bookkeeper paid the bills and he’d lost track of how many personal vehicles he was running through the books.  Another man had “somehow slipped” into the business paying for the vacations he and his family took, to the tune of $50,000 a year.

The bottom line is that most small businesses can’t support the overhead of personal costs; companies regularly go bankrupt or lose the ability to grow.  Too often personal expenses use the money needed to successfully compete in the marketplace: buy new machinery, hire more personnel, add a service truck, get professional help for a marketing plan or upgrade computer systems.

Use the company as an ATM

Some owners use the business as their personal ATM machine.  In addition to paying themselves a salary they skim cash.  Some owners take “just a little” thinking it “won’t hurt anything”.  One dipped into petty cash daily for pocket money, because it was easier than stopping by his bank.  He couldn’t believe it when his accountant pointed out that petty cash was costing over $1,000 a month. This was business money he could have used elsewhere.

Others take larger amounts, sometimes hundreds or thousands.  A successful painting contractor skimmed large amounts of cash.  However, when he wanted to expand his business he couldn’t prove to banks or investors how profitable he really was.  While his books showed him in the black, they didn’t show enough volume or cash flow to repay the loan he wanted.  Until he changed his behavior he was unable to grow.

It doesn’t matter how it’s done, using your business as a personal bank is short-sighted and self-defeating.  Strategically used business money can be turned into higher profits, which means an increase in personal money via salary and bonuses.  We all know the moral of the story; you don’t kill the goose who lays the golden eggs and you don’t ruin your business by using it as a personal bank.

(Sidebar – this article intentionally leaves out the tax problems and consequences that come from these behaviors.  Those are a different discussion.)

• Related Article: How to Stop Employee Theft

The post Ruin Your Business – Use It as Your Personal Bank appeared first on Business Management Advisors & Consultants | Cogent Analytics.