Future Proofing Your Business With Profit

business profit invest

business profit invest

What to do and what not to do with the profits in your business

Profit is good. Profit is fun. Profit makes us smile.

Business coaches like me will tell you that a business must make profit or it’s a hobby instead of a business.

Just to be crystal clear about what profit is:

  • Don’t confuse profit with the owner’s wages. Profit is the money left over after all wages and other costs have been paid, including the wage of the owner.
  • Don’t confuse profit with what’s in the bank. That’s cash. Cash has very little direct relationship with profit (More about cash here).
  • Don’t confuse profit with the Purpose of your business. Profit is what you need to fulfil the purpose of your business instead (More about purpose here).

The reasons a business must make profit are these:

  • Profit provides the means to invest in the development and growth of the business and keep the business safe.
  • Profit is the most direct and simple measurement of the effectiveness of the business model.
  • Profit provides the means for the business to pay its investors (often the owners) a return on their investment.

So let’s just agree that profit is a good thing and I’ll proceed on the assumption that you have a business, not a hobby. What do you do with the profit?

It’s no use in someone else’s bank account

The first thing you have to do with it, is to collect it. Profit is no good to you if it’s not in your bank account, but in the those of your clients. This may seem an obvious point, but you’d be surprised how many small business owners I work with make profit, and yet can’t pay their bills.

And once it’s in your bank account, what then? After all, as I cautioned before, you’re already being paid a regular wage, enough to pay your bills and appropriate for someone with your role, so you don’t specifically need it yourself (unless you really need a bigger toy of some sort).

Assuming you’ve realised that bigger toys don’t make you happier and given your nice car is already leased through the business anyway, what do you do with your growing bank balance?

Investing in the future

Invest in the business future, that’s what. Investing in the business means the business increases in value and makes the business future proof.

Let’s say you’ve made $100k net profit before tax last year. The tax department is going to want a piece of it, let’s say 30%, and that leaves $70K to do with as you see fit. In all likelihood, if you are the sole owner of the business, it makes a lot of sense to pay yourself a piece of that, either direct or into your superfund. Let’s say you decide to give yourself a $20K dividend and that leaves you with $50K to invest.

What happens next is of course entirely dependent on your circumstances. Maybe your business plan calls for opening a second store or office elsewhere. You may need to sign a lease for the new office and pay a rental bond. You also may need to invest in a new website or a marketing campaign to get the new store moving, or maybe you will be traveling a lot for the new store in the coming year. What you don’t want to do is cannibalise the finances of the current business, so you set half of the profits aside to finance the expansion. This is a great way to invest your profits.

Keeping the doors open for 6 months

profit invest business Another great way to invest your profits is to open a separate savings or investment account to build up a cash buffer in your business. I’ve often helped my clients build up cash reserves in a separate account equal to 6 months of their overheads, so that if the market takes a turn or there is a gap between contracts, you don’t have to “buy” contracts just to keep the doors open (“buying contracts” is always a bad idea).

So here’s what you gotto do:

  • Pay yourself a wage or equivalent.
  • Make profit.
  • Collect the profit.
  • Pay yourself a dividend.
  • Open a separate savings account.
  • Transfer as much money as you can into the savings account, every month ideally, and build up real value in the business to give yourself options down the track.

You’ll be glad you did… I promise you

Read all about Money, Profit, cash flow and keeping your fingers on the pulse here

For more information about to how to step out of overwhelm, get unstuck and start having Fun in Business again, click here

#businessProfit #businessowners #FunInBusiness #Businesinvest #FutureProof

 

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1001 Business Bedtime Stories… Amanda Manages Her Finances and Makes Money

 

Truth 4 financial management
Truth 4 – Financial Management

1001 Business Bedtime Stories… Truth 4, Financial Management

Amanda Owns a boutique hotel and learns to manage her finances so that she starts to make money and have a lot more fun.

Once upon a time… a long, long time ago in a country not unlike Australia…

Amanda owned a small boutique hotel in the inner city.

Amanda’s hotel relied on five different corporate accounts for a significant percentage of its annual revenue. The room rates that Amanda charged these corporate customers was fairly heavily discounted, and payment arrangements varied widely between the five accounts, with some bills being settled on the spot and others on payment terms up to 90 days.

Even though her occupancy rates were very high, Amanda struggled to pay her bills and wages most months.

Clearly something wasn’t stacking up. Two obvious conclusion might have been that either her costs were too high or her rates too low. But Amanda knew that her rates were in line with similar properties in the city and she managed her costs tightly.

Each week Amanda thought, “If it is neither my prices nor my costs that I need to change, what else is open to me?”

Amanda was going grey.

The Bootcamp

Working in The Bootcamp with me, Amanda came to appreciate the difference between turnover, profit and cash, and that she needed to give equal attention to all three. Amanda also came to have a better appreciation of her ‘break-even’ point.

It was time for Amanda to set up proper controls for all three financial factors and to set in place a minimum break-even point below which it was simply not possible to go.

So she did… and it took a lot of courage.

Through working in The Bootcamp, Amanda developed a series of financial reports that showed her monthly cash was short because all her profit and working capital was tied up in corporate accounts that were paid between 30 and 90 days.

Amanda also worked out that the minimum room rate she could charge and still break even was $115 per night at 100% occupancy rate, or $145 per night at 75% occupancy, but only if the bill was settled on the spot. Rooms that were paid for at 30, 60 or 90 days would need to have significantly higher rates.

Armed with this knowledge Amanda was able to negotiate better terms and rates with four of the corporate accounts. The fifth one didn’t want to come to the party and, although it felt like the scariest thing she ever did, Amanda stuck to her guns and stopped doing business with this company.

In a matter of four months, things started to turn around and Amanda’s bank account now looks healthier than it has in years. Through the process Amanda has actually gained two new corporate accounts, both of which settle their bills weekly with a corporate credit card, further adding to the health of her business. Amanda and her staff can now focus on what they are good at: making their guests feel at home.

And Amanda and her staff will live happily ever after… The end.

Ask yourself… Where will you find the courage to make profound things happen in your business?