From the February 1996 issue of Entrepreneur

Fred Petrillo worked hard at his business, an enterprise he and his brother inherited from their father, an Italian immigrant who came to the United States in 1910. They built their company from an obscure venture operating with horses and wagons to a $15 million trash collection business.

Like many entrepreneurs, they poured all their money back into the business, never saving for retirement or future financial needs. The sale of the business would take care of that . . . or so they thought. No one could have foreseen changes in rules and regulations that would drive them, after 40 years of building their business, into bankruptcy and ruin.

This story isn't fiction. Though the names have been changed, the point is very real. Many old-time entrepreneurs didn't have business degrees or corporate backgrounds, and they didn't realize that to be truly successful, it's necessary to diversify your assets.

Today, the baby boomer children of those earlier-generation business owners are well into adulthood, and corporate downsizing, combined with a desire for individuality, has driven many of them to become their own bosses. With their better education and increased access to information, surely today's entrepreneurs won't make the same mistakes as their fathers . . . or will they?

If you were born between 1946 and 1964, demographics place you in the baby boom generation. The boomers, who number 77 million, are now moving through their peak earning years. In general, the baby boomers had the benefit of more education than preceding generations. Growing up, they enjoyed a sense of entitlement and material abundance that, for many, has become part of their psychological makeup. But cash may not flow so smoothly for the boomers as the years go on.

The first wave of boomers is 15 years from retirement, and their needs are vastly different from those with 35 years to go. We'll divide the group in two-those born from 1946 to 1955 (41- to 50-year-olds) and those born between 1956 and 1964, aged 32 to 40. Whether you're part of the Woodstock generation or you were "born to run," the time to assess your financial situation is now.

Spend, Spend, Spend

"There must be money in my account . . . I still have checks left!" This may sound like a line from a comic strip, but for many of the younger boomers, born 1956 to 1964, it's close to the truth. Big houses bought with so little money down that mortgage payments take up one-third of their income . . . credit cards charged to the limit . . . lease payments on the BMW . . . and don't forget that golf club membership.

"This group is aggressively climbing the ladder of life and hasn't yet reached its peak earning years," says Matt Oechsli, president of The Oechsli Institute, a sales consulting firm in Greensboro, North Carolina. According to Oechsli, the main focus of younger boomers is maintaining their current lifestyles. For those who have children or are thinking about starting a family, this includes the additional challenge of getting the kids through college without lowering their own standards of living. Retirement planning and balancing career and family round out these boomers' main concerns.

Enter the Woodstock generation. If you were born in the earlier years of the baby boom, 1946 to 1955, you may have traded in your tie-dyed T-shirts for a suit long ago, and you've probably already heard the savings wake-up call. Though maintaining their current lifestyles is still important for older boomers, it ranks behind educating children and their primary goal: saving for retirement.

The Entreboomers

Combine the boomer mentality with an entrepreneurial one, and the situation becomes still more drastic. Life is different for entrepreneurs, whether they're baby boomers or not. "Often, an entrepreneur's entire net worth is tied up in the business," says Derek Sasveld, a consultant at Chicago financial consulting firm Ibbotson Associates.

Though they have many of the same needs as other boomers, for "entreboomers," maintaining their lifestyle and saving for retirement pale against more pressing concerns. Sasveld finds these entrepreneurs have three additional money worries: maintaining ready liquidity, losing the value of their businesses, and hanging their future financial plans on the sale or success of their businesses.

One of the toughest aspects of business on any scale is cash management. Most entreboomers invest heavily in their firms, reasoning, "Here's a business I know, so here's where I can make the greatest profit." What they don't see is the potential for problems.

Problems arise when there is a sudden need for liquidity. Often cash can't be had easily or cheaply, forcing tough business decisions. Cindy Griffin, financial center manager at BB&T Bank in Charlotte, North Carolina, agrees: "Before you get into a bind, develop a banking relationship. Let the banker in on your developments, dreams, problems and progress, and provide updated business plans. That way, he or she will become a stronger ally, more ready to go to the mat for you."

Golden Years or Golden Arches?

Cash flow and liquidity are just part of the entreboomer's problems. Unlike employees who benefit from corporate retirement plans, too many entrepreneurs rely on the profitability of their businesses to see them through retirement.

Allan Ross, a CPA and consultant in small-business management, notes the market value of most small businesses is based on recent years' profits or cash flow. "As a result," says Ross, "several bad years can have a severe adverse effect on the selling price of the business-and the amount of money available for retirement."

"Many times, small-business owners approaching retirement are reluctant to make any additional investment in their businesses to keep up with changing business circumstances. They try to 'milk' the business for all they can. This will work in some industries, but in others, it can backfire, producing a loss of business and reduced cash flow just before the retiree is ready to sell the business."

Many entreboomers dream of early retirement, but despite what the numbers indicate, they may be working longer, harder and for less money than today's retirees unless they begin funding retirement plans and savings.

Financial advisors contend having a comfortable lifestyle after retirement requires an income of almost 80 percent of an individual's average income in his or her last five years in the labor force. A study released by Merrill Lynch & Co. Inc. calculated that, when the value of a family's home was not taken into account, baby boomers are saving at only one-third the rate necessary to maintain their current level of consumption in retirement.

Social Insecurity

Adding to this dilemma, entreboomers, unlike their parents, may not enjoy the safety net of Social Security. According to the Employment Benefit Research Institute, in 1992 Social Security comprised just 42 percent of the income of the population aged 65 and older and will provide an even smaller benefit in the future.

Several conclusions are clear. If you keep going the way you're going, you may be able to retire in style . . . or you may not. To start building the foundations for a solid financial future, here's what you can do:

  • Keep track. You may not realize it, but you probably spend too much money on-well, who knows what. Try tracking your expenditures for a few weeks or a few months. You'll be surprised how much you spend at the cappuccino counter and office supply store.
  • Beware your spending pitfalls. All of us have places where we tend to splurge without realizing it. Whether it's new computer software, a new suit or new office equipment, ask yourself twice if you really need it now.
  • Invest automatically. Every month, have money drafted from your bank account into some kind of retirement plan. Ideally, put in the maximum allowable, but don't worry if you can't: Even $2,000 placed in an IRA annually can help you on your way.

A financial advisor can help you pick the plan that's right for your needs.

  • Allocate your assets among stocks, bonds and cash. If you want growth, you'll have to invest in stocks. Start small, and add a little each month.

Begin with these small steps, and soon you'll be on the road to financial success.

Money Makeover

Seven Hills Country Inn and Restaurant in Lenox, Massachusetts, is the best of the Berkshires-and Jim and Patricia Eder are doing whatever it takes to keep it that way. But when they bought the turn-of-the-century mansion a year and a half ago, its 52 guest rooms, parlors, dining rooms and restaurant were falling apart. The Eders' most pressing financial concerns: keeping their business afloat, financing college for their two young daughters, and preventing a loss in their investment portfolio.

The Eders, both 38, made a smart move when they enlisted the financial support of Rafael Flores, Patricia's father. His assistance prevented them from depleting their savings in start-up. Roberto Flores, Patricia's brother, is also a partner in the business. He works at the inn full time, enabling Jim to keep his "day job" as a financial analyst. All four partners have chosen to forego salaries for now, instead pouring every penny back into the business.

The Eders' number-one problem is cash flow. "If we'd have known what it takes to run this place, we might never have bought it-and that would have been the greatest mistake of all," says Jim. But payroll to employees-more than 50 in the high season-can swell to $70,000 a month.

The Eders' next priority is educating their girls, aged 3 and 6. To finance this, they've relied on stocks. "So far, I've been lucky," Jim says. Trained as an engineer, Jim is familiar with technology, and over the past 15 years he has invested heavily in that sector of stocks and mutual funds, with stellar returns. The problem is knowing when to take profits to avoid a sudden downturn in this volatile area.

Jim worries that the business may be losing money because he isn't there to supervise it during the day. Increased cash flow would allow him to take a salary and give the inn his full attention. To do this, the Eders could consider borrowing against the inn's value or using their home or stock portfolio as loan collateral. One loan worth looking into is the Small Business Administration's LowDoc program. This program cuts paperwork for loans up to $100,000.

To finance their daughters' education, the Eders must first find out how much they will need. A financial advisor could give them a better idea of how much to save and what return to aim for.

If technology stocks are keeping Jim up at night, moving some of their stock profits temporarily into less volatile sectors might help. But before making any changes, he should consult their tax advisor about the consequences of any changes. Then he'll get the good night's sleep the inn is famous for.

What's It Worth To You?

Figuring out your cash flow and net worth are the first steps in taking control of your financial life. Before you start filling out the worksheets below, pull together as much financial information as you can, including last year's tax return; bank, brokerage and credit union statements; credit card statements; mutual fund and stock reinvestment plan statements; retirement account records; mortgage information; loan repayment schedules and life insurance policies. Fill in the blanks on both worksheets and you've got it-your preliminary net worth.

Now go back and look at the value you've attached to your business, collectibles and personal property. Most people give these items much more credit than they're worth.

Not happy with your net worth? Take a look at your cash flow to see where you can make changes. Buy an inexpensive notebook, and write down every cent you spend for a week. When you see it all in writing, decide what you can cut-and cut it. Once you've got the cash flowing a little more freely, keep on track by evaluating your net worth annually.