Money doesn't make the world go 'round It shows us who we are

Are You in Reality With Money?

Before we dive in, I offer some context. I break a lot of marketing rules by having a complex service offering. I combine business, psychological and spiritual perspectives to solve problems. In the domain of money, economic realities and dynamics must be understood, but they are not enough.

Because money is a symbol of value, and what we value is at root a feeling, it cannot be divorced from human emotions, which are impacted by childhood wounding. And because what we value always exists inside a paradigm that defines what is good and bad, money cannot be divorced from spirituality either.

This means in order to address completely a money issue, you need a financially literate psychospiritual approach. I’m here all week. 😉

There are six aspects of reality that humans have the deep issues with:

  • Sex (listed first so you’ll keep reading)
  • Love
  • Power
  • Death
  • God
  • Money

Money is the topic of this piece, specifically the well-worn tradition of spending more than you have. We all know it’s bad, but just like eating more than you need to, many do it. In the same way, “Eat less and exercise more” is true but a radical oversimplification of a solution, so is “Don’t buy things you can’t afford.” Regardless, this SNL skit on that subject is a must-see.

I’d like to address a particularly tricky expression of this issue that I see often: what small business owners take out of their businesses.

First of all, I get it.

Starting a business from scratch, working the sixty-plus-hour weeks, doing thankless jobs, losing sleep, and everything else that needs to be done is a lot. Most people never have an appreciation for how difficult it is to be a leader. The pressure of making payroll, the weight of debt, and always being the final decision maker is incredibly difficult.

And when people do difficult things, they expect rewards, right?

For this reason, owners tend to radically overestimate the fair market value of their business, which we’ll cover later. It’s completely understandable, but it’s also a problem.

In the same way, many business owners take out far more money from their businesses than is healthy–for the owner or business. There is no pat “answer” for what is okay to take out, and that’s where the overspending dynamic can hide. The problem is that the feeling an owner has about what they deserve may not match the reality of what the business can afford to pay them, and just because they can take out $XXX, doesn’t mean it’s healthy to do so.

When an owner takes more money out than is healthy, it distorts the reality that is supposed to be represented by the profit and loss statement. If the owner takes out $500k/year as a salary, but only does a job worth $200k, they remove $300k from net profit. That may cause them to think their net profit should be higher when in reality it’s already strong by industry standards.

The demand for unrealistically higher profits leads to a too-lean labor force, underpaying employees, unreasonable performance expectations, and other problems. This leads to low morale, increased attrition, and disengagement. That gets passed onto the customer experience. Overworked, underpaid, and undersupported employees don’t serve customers well.

Do you notice when you talk to the average customer service rep at a bank, insurance company, or utility, that you can’t feel that they care? That’s because their manager doesn’t really care about them, and the business is oriented around increasing shareholder wealth, not creating value in the world which is why businesses exist.

Unfortunately, unhealthy relating with money makes acquiring the symbol of value (money) more important than producing the value through outstanding goods and services. This creates what is sometimes called “extraction consciousness,” and it’s the same dynamic that ensures we’ll remove every last drop of oil from this planet before significantly investing in alternative energy.

To evaluate and address immature extraction consciousness we must address some key questions.

What are the long-term business goals?
If you don’t have a documented vision for what the business should look like in three to five years, it’s impossible to define how much money should be left in the business. Building a cash position is critical for acquisitions, getting loans, expansions, non-operating expenses like lawsuit settlements or tenant improvements, and more.

What’s your emergency fund?
Every individual ought to have at least six months living expenses in cash and so should a business. How many restaurants needlessly went out of business when Covid hit because they didn’t have enough cash saved? Cash is insurance and you’ll never know when you need it.

Are you using money to feel better?
It’s extremely common for people to fill emotional holes with money. Unfortunately, you can never have enough money to fill such a hole, and when you try, Life tends to hold you accountable and make things worse.

What is your fiduciary responsibility?
Officers of a corporation have explicit responsibilities to serve the financial health of the business. Taking too much money out of the business could be interpreted as negligent and open you up to a personal lawsuit from another owner or stockholders.

In most small businesses, this is not a real risk, but the principle is important: owners have a legal responsibility to not relate to their business like an ATM and take whatever they want out of it.

Do you know your wound-based relationship to money?
Because money is a symbol of value and what we value is influenced by our core emotions, there is unfortunately no human who is immune to some amount of wound-based relationship to money. Broadly speaking, this means everyone is either a hoarder, spender, or monk who seeks to avoid dealing with it entirely.
“If you don’t strive to uncover what is unseen and understand its nature, then you are setting yourself up for failure.”
–Ed Catmull, co-founder of Pixar

If you’re not actively curious about how your wound-based relationship with money plays out, then it will steer you into trouble…because reality it wants to be revealed–your unconscious protectors don’t.

What do you think money is?

Related to the above, our distortions around money cause us to project on it. We think it’s power, prestige, fun, success, security, happiness, etc. Most small business owners think it’s freedom. Hear me: it’s none of these things. None. When you think money is one of these things, unconsciously, you depart reality, and enter into a fantasy/nightmare where you can never get enough of what will never satisfy you. If you think this doesn’t apply to you, then it means it applies to you more.

Quick aside: I started out with a fairly clean relationship to money. Of my six things, it was the easiest one for me, but I still had things to work through. In the last few years, I earned enough money that I really could buy whatever I wanted for the first time in my life. Did it bring me the happiness some part of me unconsciously expected? Not at all.

It actually brought up existential meaninglessness because the unconscious hope that one day I would be happy when I made X amount of money was challenged. There are always more layers with these six things and just when you get comfortable, life will give you a new angle on these core issues.

Are you privatizing profit and socializing risk?
This is what created the 2008 financial crisis and it happened on a global scale because it’s often what individuals do. Many executives walked away from the ashes of 2008 with multi-million dollar bonuses, funded by tax-fueled bail-out money. Only one person went to jail while over 10 million were displaced because of foreclosure or job loss.

That’s what privatizing profit and socializing risk looks like, and the same thing happened during Covid. 573 people became new billionaires during the pandemic. Stay at home, close the schools, and get your shots financially benefited many people and widened the wealth gap between classes. That’s something that precedes the collapse of a civilization. It’s rarely a good development.

I’ve seen small businesses ruined by owners taking too much money out of them. The owners land on their feet and their savings accounts, but employees and customers are left in a lurch. Leadership includes responsibility, not getting to do whatever you want because you’re at the top, which is what children think leadership is.

Extraction consciousness seeks to maximize profit and doesn’t feel the impact it has on all the constituents involved. Do you think the significant shareholders of Phillip Morris or RJ Reynolds actually feel that their fancy cars and giant homes are funded by the deaths of 8 million tobacco related deaths each year worldwide?

Extraction consciousness requires a narrowing of perception because the over focus on money must be at the expense of focusing on other things. This is why the urge to maximize profit must be replaced with an orientation of “optimizing” it. Optimizing includes a broader vision, sensitivity to impact, and looks holistically at the business, all of its constituents, its future, etc. It’s the opposite of relating to a business as an ATM reward system. It’s what leaders as stewards do.

In the years leading up to the 2008 financial crisis, many finance professionals saw what was inevitable: when the bad mortgages that were destined to fail, did so, the economy would collapse. But they didn’t care because they were too busy getting paid. That’s extraction consciousness. Selling mortgages to people who can’t afford them isn’t in reality. It’s fabricated money that created a speculative bubble that eventually had to burst and then everyone paid for the sins of relatively few. That’s what extraction consciousness does. It doesn’t care about the impact it has on others because it’s a misguided attempt to care about oneself.

Reasonable dividends and business valuation
If you own a business, the first chunk of money you’re entitled to take out of it is what you earn through the work you perform. To determine this, you have to have an org chart and actually run the business according to it. If you’re the CEO, you deserve the pay the position would demand on the open market. But if you replace yourself and don’t work in the business anymore, be careful. You’re not necessarily entitled to that CEO salary anymore. And if you’re not the CEO but help out with sales or production, taking a CEO salary just because you’re the owner knocks all of your financial statements out of reality.

At that point, you actually take out dividends disguised as salary to reduce taxes. You can do that, but you have to realize you no longer have an accurate financial management picture. Unfortunately, most accountants are far more interested in your tax savings than keeping you in reality. Their clients enjoy the former far more than the accountability of the latter (ironic, because they’re called “accountants”). So what’s okay to take out beyond the jobs you’re compensated for?

That question should be reframed as “What’s a reasonable return on a high risk endeavor like a small business?” We have to start with competitors to the investment. You can get 4-5% in a savings account right now. Long-term stock market returns average 8% after inflation. So if you can get 8% without doing anything and at relatively low risk, then a small business investment should yield more because it’s a greater risk.

So it depends on many factors, but I’d say owner dividends should be no more than 20% of EBITDA. If you’re the chair of the board for a $5MM business that profits $1MM/year (20%), at most you’ve earned 20% of that profit, or $200,000. That’s provided the business gets everything it needs for the present and future.

If you want more money than that, consider selling the business. That’s where the real money is, if you built it well enough to sell. But if you want to keep it and take out everything you can, that’s a “cake and eat it too” dynamic you will eventually pay a price for.

While on the subject, it’s common for people to think they can get 3-5x gross revenue for their business and this is mostly absurd. A business’ value is more commonly based on its net profit, not its top line revenue which is meaningless if it doesn’t profitably use those dollars. The more common valuation is 3-6x EBITDA (a conservative measure of net profit), with an 8-10% discounted cash flow method applied. Remember that stock market ROI comparison above? Well, it applies to valuation as well. A potential buyer can get 8% return in stocks with far less risk than buying your business, so they want more, and judge the value of your business accordingly: i.e. can your business beat the market? Because the S&P 500 is structurally more stable than your business, future profits are discounted because of risk.

So in the example above, with $1MM profit, the buyer would add together (let’s say) five years of net profit, discounted 10% each subsequent year:

  1. $1,000,000 (no discount on first year)
  2. $900,000
  3. $810,000
  4. $729,000
  5. $656,000

The total value would then be the sum of the above: $3.2 MM. The idea is that’s how much free cash the business produces in five years, adjusted for future risk. Notice how different that number is from just 3x $5MM total revenue = $15MM. There are many other considerations and modifications to this, but it’s the best quick and dirty valuation and a good way to get in reality.

There is a general increase in spending beyond one’s means in our world because of the rise of a subjectivistic orientation toward reality. Subjectivism is the assertion that reality is what the individual says it is. I’ve written extensively about this in other articles so won’t go into detail here, but suffice it to say that we very much live in a “I have alternative facts” world (thanks Kellyanne Conway, who gets a nickel every time it’s said) where objective reality is becoming less and less popular.

This is easy to observe if you know how to look. Most recently we saw the Republicans under Trump take Covid too unseriously, and then the Democrats under Biden waste trillions taking it too seriously. “A pandemic of the unvaccinated,” Joe? Yeah, that wasn’t true even a little bit. Even calling it a “vaccine” still isn’t reality.

It’s difficult to be someone who is pro-reality in a world that is actively against it while in denial of such. It makes you a minority and it often makes you disliked, but the willingness to be disliked is a critical part of leadership. As most people continue to explore the limits and consequences of extreme subjectivism, they will need people who abide with reality to catch them when they fall. How can you be such a person?

Pay attention to your relationship to the six things (sex, love, power, God, death, and money) and actively work on evolving them to abide more so with reality, no matter how uncomfortable it is.