In business schools, students are taught that it’s important to match the right type of financing to the underlying asset that is being financed.
For example, you wouldn’t buy a building with a line-of-credit that carried a high interest rate and was supposed to be paid off every few months.
Nor would you finance your 30, 60, or 90 days accounts receivable with a 30-year mortgage.
But I often see entrepreneurs setting goals and rewards that don’t match the potential cash flow cycles needed to fund them. Before I share a common example, let me remind you of the difference between a goal and a reward:
- Goal = some business objective you have set, such as number of new clients, revenue or profit goals, PR goals, etc;
- Reward = an arbitrary but tangible thing you agreed to give to yourself if and when you achieved a specific goal.
Rewards Work for Everyone
This system works for everyone, in fact the literature is full of studies that find that the most common reason people fail to achieve their goals is that there was no associated reward that made the effort rewarding.
A small goal (getting out 50 letters to former clients or meeting five potential influencers for coffee) could have a small reward like an afternoon at the spa.
A large goal (winning a new six-figure client, hiring a full-time designer, or launching a new brand and website) could have a large reward like a week’s vacation or a new car.
In fact a new car is a great way to look at the problem of matching goals and rewards with cash flow. If you’re considering a car that will have a monthly payment (lease or purchase) of, say, $800, then getting a new client that is going to generate $20,000 a month on average over the next 12 months is probably a safe “match,” even though the car payment will go on for several years more. There is plenty of cushion and some incentive to go land the next big project.
Want a Second Home?
But what if like many of my clients, your big goal is a second home. And, let’s say that the mortgage payment and operating costs will run $6,000/mo. With the newly-added $20,000/mo you might be tempted to think that now is the time!
But in this case, you would be matching the wrong type of reward to a given goal. Unlike the car, in this case you run the real risk of taking on a $6,000/mo payment for 15-30 years, based on cash flow projections for only one year.
What happens one or two or five years from now if the “roller coaster of sales” that is the norm for interior design firms turns down? Would you want the same $6,000 payment that seemed very affordable at the top of the roller coaster to be permanently in place when you are at the bottom?
Rewards should be fun but also non-threatening to your financial future. Be sure and “do the math” over the long term to make sure you are not taking on anything that might become a “stretch” months or years down the road. Follow my rule: “No stretching!”