Dave Ramsey is awesome.

I love his stuff. I think his book Total Money Makeover, his radio show, and his financial literacy course, Financial Peace University, are amazing tools for people who want to get control of their personal finances. There’s only one problem: MOST of his stuff assumes that you have regular income provided by working in a JOB. Most of the readers of this letter don’t have “jobs.” Most of you make your money in your own business and take your pay as either some combination of distributions and salary, or in many cases ONLY distributions and you only take them IF you have money in the bank. This really messes up Dave’s system, which assumes that most people have a fixed income (salary from a job) and that everything we spend must be managed within this finite amount of money. His systems assumes that we can “save our way to prosperity.”

But that’s not the case with small businesses. We have to SPEND money without a guarantee that we’ll get that money back every day. It’s part of running a business. It would be great if our business had consistent and definite income and absolutely no expenses, but that’s not realistic.

As small business owners, we’re often faced with the question of “how do I know if I should spend this money right now?” We make decisions about marketing expenditures, human resources expenditures, inventory expenditures, etc. on a regular basis and we often do it by licking our proverbial finger, sticking it up in the air, and hoping it tells us which way the wind is blowing (does that even work, anyway?).

So how do we know WHEN it’s okay to spend money? Here’s a simple process that I encourage all of my clients to adopt when it comes down to spending money.

You MUST have a budget. A budget is a way to rule your company finances instead of letting them rule you. Small business owners often get tripped up on this step because “our business is so seasonal,” or some version of “I don’t want to be told what to do by some stupid spreadsheet.” Budgets don’t need to be perfect, but they are important. They are important because the more we are able to PLAN AHEAD for things the better. Budgets help us see several things. They help us see WHAT we are going to spend money on and they help us plan WHEN to spend that money. By planning our expenditures around times when we think that we will have the most cash, we avoid crisis purchasing and increasing debt. For more information on creating and using a budget you can pull out Issue Two of this newsletter and read the article called “Tina The German’s Financial Reporting Process.”

Plan In Advance. As much as possible, you need to be planning your company expenses in advance. Inventory, equipment replacement, and maintenance, and even hiring new employees, should never be treated as “surprise” expenses. Plan in advance for as much as you can, so that you can be sure that you are allocating gross profit to these expense accounts before they become a crisis. Plan for crisis spending as well. Allocate some portion of your earnings each period to a company “emergency fund” just like you would do in your personal finances.

Breed Out Impulse Buying. If planning your purchases in advance is a good idea, buying something on the spur of the moment is a terrible one. This goes for both YOU and YOUR EMPLOYEES. You must learn to avoid making purchasing decisions for the wrong reasons and pass this on to your employees. The message that you want to send is a) we are in control and b) we never spend company resources on the spur of the moment. Don’t browse industry websites or “shop for fun.” If you’re only buying something because you can justify is as “I might need this one day,” or “shopping is fun!”, you’ll likely end up spending too much on stuff you don’t need. It’s okay to WAIT to buy something.

Control the Debit/Credit Card. Yes, it’s easier to just give each of your employees their own company card, but that encourages impulse, unplanned spending. The same goes for accounts at local supply houses or other vendors. By instituting a purchase order system, credit card control, and spending limits, you are saying to both yourself and your employees that a) money is important and b) I am aware and in control of the company finances. Remember, YOU don’t have to manage the cards, but you must have a SYSTEM that manages them. It could be as simple as a credit card checkout system managed by your office manager (who knows the budget).

Pay In Full. When at all possible institute a policy of paying for things in full instead of utilizing credit or financing them. This is not only a good way to stay out of too much debt, but it’s also a great way to SLOW DOWN your spending and it forces you to PLAN AHEAD. Obviously this isn’t always possible in business. which brings us to step six.

Use Lines of Credit Wisely. In my book there are only two good reasons to use credit: a) to pay for EXTREMELY expensive items that will help the business make more money or save more time, or b) to bridge the gap between accounts payable (when we need to pay for something) and accounts receivable (when someone pays us). Do not use credit for instant gratification unless you have an IMMEDIATE and SPECIFIC plan to pay that credit back as soon as possible.

Here’s the deal…no one is perfect when it comes to knowing when to spend money (including yours truly). The key to knowing WHEN the right time to spend money is, is to be in as much control as possible when it comes to your finances, so that when unexpected expenses come up, we are less impacted by them.