#24 - Why Bad Businesses Are Ponzi Schemes

Bad businesses are a Ponzi scheme, says Mitchell, in which owners hang on for dear life until the next check clears, only to immediately be in the hole again when the next project -- and the costs associated with it -- comes in. In fact, most businesses start this way! The job of the owner is to turn that bad starting business into a good one, a business where there is plenty of cash flow to handle the costs associated with taking on new business, hiring new employees, and other working capital needs without needing the cash from the next project to cover them.

Lack of capital, or undercapitilization, is a problem for many starting businesses. It's important for the owner to understand his margins, and understand his costs, so that each time revenue comes in, he can set aside some of that to handle the next project. Over time this extra cash on hand builds up to a nice stash of working capital, funds available to handle the day to day costs of doing business and growing the organization to handle more business in the future. This takes discipline, and often personal sacrifice, to leave the money in the business.

But it's the only way to ensure the health of the business, and ultimately the health of the owner. Money stress, constant worry over whether you can meet payroll before the next hit of revenue comes in, etc. can rob you of your health and happiness over time. Don't be the guy running a Ponzi scheme on yourself!

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Mitchell Baldridge

Twitter: @baldridgecpa

https://baldridgecpa.ck.page

https://baldridgefinancial.com

Scott Hambrick

Twitter: @hambrickscott

IG: @ogscotthambrick

https://onlinegreatbooks.com

https://scotthambrick.com