What Can Your Business Do with Its Profits?
As you continue to grow your business, I hope one day you get to ask yourself the question "What do I do with my profits?" It is a great feeling knowing that the business is operating in the black because it shows at least some potential for the future. Today, I'm going to prepare you for that day and help you understand what you can do when your business is profitable.
Option #1 - Save the Extra Funds and Build Up a Cash Reserve (Keep it in CASH)
Just like your personal finances, it is always important for a business to have some cash on hand to handle emergencies. Retaining prior year profits in cash is a great way to ensure continuity when things get rough. If your business has experienced cash flow issues in the last year or so, it is probably a great idea to start here and build up a savings cushion so further issues can be avoided. Once the business has enough cash to manage any anticipated projects and a buffer for emergencies, the business owner should consider the next two options because holding too much cash can be a bad thing.
Option #2 - Reinvest the Extra Funds into the Business (Turn it into EXPENSES)
Profits are simply money left over from the operation of a business in a given period of time. A business might have a profit in one year and a loss the next year depending on how the business does and how it spends its resources. If you are growing your business, it might make sense for you to spend some of that left over money next year on things like marketing, more equipment for content creation, or consultants to help continue that growth. This will likely reduce the overall business profit in the short term with the increased spending but will hopefully lead to a bigger and more successful operation in the future. For many businesses this is a good idea once there is a sufficient cash reserve and still room for growth with respect to certain areas of the business.
Option #3 - Distribute the funds (Take it out of the business)
A business can distribute its profits to its owners. Have you ever received a dividend from a stock that you own? That is a distribution of funds to the owners! This usually occurs when they have a good grasp of how much money the business will need to operate for a certain period of time and can leave that amount of money safely in the business while distributing the rest. Depending on the business, these distributions can serve different purposes. For some small businesses, distributions are effectively salaries that the owners take from the business. In other circumstances, owners will distribute any amount of money that can be put to better use elsewhere, such as other businesses or personal spending.
But What Should I Do with MY Profits?
It depends. If you are unsure about what to do with your profits, I would first reread the options above, and then ask yourself the following questions:
Does my business have a healthy stockpile of cash in case an emergency or opportunity comes up?
Can I invest money into my business efficiently? Have I identified key projects or initiatives that will be a good use of resources at this time?
Do I have a good reason to take money out of the business? Are there any negative effects in doing so right now?
By the time you have considered those questions, you should have an answer! Remember, no two businesses will work the same, and it is up to you to understand how everything works and make the best decision for your business. Good luck!