Profitability happens at different points along the business journey for different entrepreneurs. Some people are profitable right from the get-go. For others, it's a little bit more of a slog and takes a little bit longer before they get to that magical point where they see positive numbers at the end of their profit & loss statement. But you get there.
And once you achieve that beautiful thing called profit -- what do you do with it?
First, let's make sure the profit is there. Profit is one thing, cash flow is another.
When we look at your profit & loss statement, we see sales… minus expenses, minus your taxes, minus interest on debt. What’s left is net profit.
That doesn't show the full picture yet; we need to look at the balance sheet too. What's not in your profit & loss statement is any debt principal you're paying off. If you end up with net profit of $100,000, make a principal payment of $25,000, from a cash flow perspective there's now $75,000 available. So just a small little thing to think about, as you’re figuring out what to do with your extra cash.
I deploy company profit to two different buckets: a short/medium-term bucket and a long-term bucket.
Your Short-Term Bucket
The short-term bucket collects cash you can get at.
- You might build yourself a buffer, making sure you have accessible cash for three to six months, maybe a year.
- Maybe you have some credit card debt in the corporation. So you're going to pay that down.
- You’ll put aside money for taxes.
- Maybe you’re saving up for important things you want down the road: you want to make a hire, or a big investment in your business - now you have cash ready to deploy on that.
You can leave profit right in your operating account. Or move it into a high interest savings account. That’s what we do when we have extra cash -- we move it over into our high interest savings account. It takes a couple of days to go in and a couple of days to come back, but at least it gives us some earnings on the money that we're not using right away. There’s an account from Manulife bank that offers a small amount of interest from dollar one, which is great.
Your Longer-Term Bucket
This is where we're saving for retirement and bigger purchases, further down the road… like 5-10 years. This gives you time for some different types of investing.
- You might put some money into the stock market. It could be stocks, bonds, GICs… depending on your risk tolerance and what you’re trying to achieve.
- You may decide real estate is the right long-term investment for you.
- An individual pension plan is another way to save for the future. It's a really cool way to set up and use your current RRSPs, put everything all in together and start saving for your time, within the corporation.
- The other thing I really like using, and I'm using it a lot for myself, is life insurance. I'm using a whole life policy with cash value that I can deploy later on to produce an income stream for myself in retirement. (But that doesn't mean I can't use it in the meantime too. If something comes up, I can actually leverage the cash value in my policy and get cash in a few days for any emergency or shorter-term thing.)
The key thing with long-term investing is to really understand what your long-term goals are with, and for, your corporation.
Moving profit outside the company
If you’re contemplating selling your corporation, bringing in partners, or going public, consider structures like a family trust or a holding company to move cash and investments outside of the corporation.
This ensures that if and when you sell, these holdings are not part of the corporate assets. Sometimes you can move them afterwards, but that can get complicated, complex and costly.
Another thing to think about is pulling profit out to spend on yourself, whether that's a big family vacation, or funding some things that you want in your personal life. The thing to consider is the cost of that capital: when you pull a dividend or pull out a salary, however you're pulling money out of the corporation and putting it into your personal bank account, there's going to be tax, and maybe a trigger that moves you into a higher tax bracket. I'm not saying those things aren’t feasible; just be aware there's a tax bill that may be generated by taking extra profit out of your corporation.
What to do with company profit and where to keep it until you need it are good things to consider. I love having these problems, and figuring out what I can do. It's a fun thing to do because there are so many options.
It takes planning and foresight to do the right things with the profit you’re generating. Don’t spend it before you’ve got it, but you can still plan how best to use it to amplify your purpose in your life and your business.
Just a little Wendy Wisdom for you.