This post is specifically for business owners who have recently started to become very profitable. Maybe you have been struggling with your business, or just plodding along for a year or two, and you’re just now starting to make an excellent profit. The question is, what do you do with all that profit?
Here are four things to look at in terms of what to do, in order of priority. However, this is simply my own opinion. There’s not always a hard clear answer for what order is “right,” as they’re all very important. So here we go:
1. The first thing to look at is taxes. It’s very important to make sure that you’re putting enough money aside to pay your taxes. If you just became profitable, you’re probably not used to paying a lot of taxes before. You might be pretty amazed, and in some instances even disheartened, by the taxes that you end up owing. But it’s just part of doing business in the great country of America.
Keep that in mind when you’re allocating funds, or you may end up getting very behind on your taxes, which can lead to a big mess in the future.
2. After you’ve set aside enough money for taxes, really start considering paying off debt. Make a list of all your debts and begin making big chunk payments toward those. The sooner you pay them off, the sooner you stop wasting money on interest.
3. Okay, so you’ve figured out your taxes, and you have a plan for debt. Now you should build up an emergency fund for your business. Are you prepared if a tragedy strikes in your business, or if a natural disaster occurs in your area? You need backup funds to get you through tough times. As for how long the emergency fund should cover, there’s not a perfect amount. To make things simple, start with 2 weeks or one month. Then, keep saving until you meet your eventual goal. Most businesses keep two to six months’ worth of emergency cushion, which can be used to pay bills and operating expenses.
4. Fourth and certainly not least, this is the point we all want to get to. Sometimes people jump here too quickly. What am I talking about? Taking distributions. Paying yourself. Just remember, if you’re taking money out of the business, that means you’ve taken care of the taxes and debt. And, you already have an emergency fund set up. Any money that goes toward paying yourself should be extra money, basically.
All right, so you’re making a profit. Congratulations! Remember these four points as you move forward, because they’re important in terms of putting that profit to work for you. Make it a better than awesome day!