(Part 1 of 2)
Many of my clients (and a few non-clients) that are business owners have asked me what to do with business profits. The answer to this question certainly depends on a variety of factors, like:
• The amount of the profits
• The predictability and reliability of future profits
• The business owner’s current financial situation
• The business owner’s personal and professional goals
• And there are others
But, we’re going to focus on four of the most effective ways for business owners to leverage their profits:
1. Paying off debt
2. Taking it home
3. Reinvesting it back into the business
4. Investing it elsewhere
We’ll examine some of the pros and cons of each, and I’ll provide some guidance for deciding how to determine which option may be best for you.
There’s a lot to cover here, so I’m going to break this topic into a two-part March Insights series.
Part 1 of 2
In part one, let’s tackle the first two “profit options”, which are both non-investment-based choices.
Profits Option #1 - Paying off debt
I chose to start with debt reduction (or elimination) for a good reason. When a client asks me what to do with their business profits, the first actions we take are to review and discuss his or her debts. While I believe in leveraging credit appropriately, and that it can significantly boost balance sheet growth rates, I also know that too much debt can overwhelm a business or business owner. Balance is an important part of the equation, but as a rule, paying down debt is usually a good use of capital.
Paying off debt and freeing up cash flow empowers business owners to take advantage of opportunities that may present themselves over time. If you are operating with high debt ratios, you might miss a golden opportunity for expansion or even to buy out a competitor because the bank won’t lend you additional money. You would likely also be subjected to providing far more documentation and justification to your lenders for every decision you make within the business. So, for most businesses, I recommend maintaining debt ratios that are lower than the industry standard and lower than the competition. If you are not in that financial position, paying down debt could be a fantastic strategy, regardless of the current interest rates.
Profits Option #2 – Taking it home
I realize now that the phrase, “you can’t take it with you,” isn’t originally from my mother; but she sure said it a lot… and these days I’ve become quite aware that she was right.
After 15 years of providing financial advice, I have, unfortunately, had some clients pass away. I know from raw, first-hand experience that those deceased clients did not “take it with them”. It is in those moments that the truth and clarity of, “you can’t take it with you” is truly felt and understood.
While I have seen unprepared heirs argue over and quickly whittle away left behind assets, I’ve never seen any assets stacked up in a coffin.
Enjoying the fruits of your labor is a must! I am hesitant to write that because most people, regardless of income, have inadequate retirement savings. Still, I truly believe we should all find a nice balance and spend a little along the way.
If you spend your entire career reinvesting back into your business and saving every penny of your money, you’re going to lose your identity outside of your business. You may suddenly wake up one day and realize that your business defines you. You may realize that without your business, you have to reinvent yourself starting from scratch. Staying engaged in activities and interests outside of your business takes time and money. Spend a little of both on things you and your loved ones like and you will enjoy life more. Plus, you will probably be a better business owner and manager.
Numerous business books are written about balancing work and home life. There is a reason those books are so popular, and as business owners, we already know it. I always stress to my business owner clients that you have to spend a little on yourself. You are running this business so you can have a better life for your family. Spending a little along the way proves it to them and to you.
Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisory services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pathfinderwc.com. Jason can be reached at [email protected] or 910-793-0616.
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