Building Your Net Worth is the Key Definition of a Successful Business Owner
Tell someone that you own your own company and already they think that you have a lot of money. Even other business owners use the wrong measuring stick to determine their business success. So what is the true definition of a successful business owner?
Is it a business that has reached a certain amount of sales? Is it a business that has been open for a long time? Or is it a business where the owner can say, “I have my own company”. The true definition of a successful business owner, in my opinion, is when their business has significantly increased its net worth.
If I Could Only Reach x Million in Sales
One of the most common measurements of business success I see business owners use is the sales of their company and it is often the wrong measuring stick. I see business owners all the time who believe that if they reach a certain target in sales then magically they will make a lot more money. It is important to remember that the sales of a company are irrelevant if the costs of the business goods/services are higher than the sales. We all know this to be true, but many forget this formula and focus their attention on the wrong strategy, sales growth.
A Good Net Profit is Nice…But
The second primary gauge of a successful business may be its net profit. If the net profit is at or above what other similar businesses are making then many would consider their business to be successful.
At least now, looking at a good net profit is on the right track but I have seen business owners who actually outspend in the personal and business life that net profit causing them to get deep in debt.
The Flexibility a Business Gives
The third gauge, and often the biggest driver for why people keep a dying company going, is the flexibility a business gives in their personal lives. The ability to go golfing whenever one wants or to take time off in the middle of their day are key benefits of being self-employed but at what financial cost? How many entrepreneurs can say that they take a lot of time off at long stretches? And if your thinking that you don’t have to answer to anyone in your own business you are sadly mistaken. Business owners answer to investors, banks, customers and even employees.
It’s All About Net Worth
Most of the businesses I see are only able to pay the owner just enough to cover the owner’s personal expenses with very little money left over to increase net worth.
I believe that a successful business owner is someone who has a business that is significantly increasing one’s net worth or building a very sellable business that will sell at a high multiple.
To me, that is the true gauge of a successful business because a sizable net worth gives one option in business and in life. Plus, increasing your net worth or having a very sellable business is a direct indicator that your business is very healthy.
Watch Those Personal Vices and Expenses
I see many business owners who believe that their businesses are doing better than they are so they have an expensive lifestyle. However, anyone who has been through a recession or a downturn in their industry has learned that there are ups and downs in how much a business makes. My friend, another successful business owner, used to tell me that the graph of his yearly net profit was like watching a squirrel run. There are huge ups and downs that are often unpredictable.
Instead of trying to increase your sales, look for ways to improve your profits and then look for additional ways to take those profits to increase your net worth.
One of the #1 ways to increase your net worth is rather simple but very hard to be disciplined about: don’t overspend in your personal life. Until you have significant net worth to back up your spending, don’t buy that expensive jewelry for your significant other. Don’t buy that huge house. Don’t buy that expensive sports car.
When I have spent a lot of money on something like a big vacation, it was because I had the money and I felt my net worth and business was healthy.
The Art of Patience and Reducing Tax Burden
Early in my career, I made a lot of moves. I bought my office building at a steal and I greatly increased its value through renovations renting other floors out. I bought the least expensive house in one of the more exclusive towns in New Jersey and I renovated the house when I had the cash. Moves like these increased my net worth greatly and allowed me to weather changes in my business. It also allowed me to borrow money for my businesses cheaply because I had equity or assets.
I also always paid attention to how to reduce my taxes. Next to your payroll at your company and your personal home mortgage, taxes are your biggest expense items so the better you are at tax planning, the more your net worth can grow.
Around year 15 of building my companies, I realized that the most important indicator of my business success was if my business was growing my net worth and at a percentage that I deem acceptable. Was I on track to reach my goal is always on my mind.
Luckily I can say, by growing my net worth, I have been able to stay self-employed, build new companies, and enjoy a relatively stress-free life.
Author, Stephen Halasnik is a serial entrepreneur having built 7 successful businesses in the $5-$20 million revenue per year range over the last 25 years. One of those companies was on the Inc 500 fastest growing list. His latest company is Financing Solutions (www.financingsolutionsnow.com) which provides Lines of Credit to small businesses and nonprofits throughout the United States.