Pay Dirt!

Finally making a profit? Put it where it belongs--back in your business. Our experts tell you how.

Imagine you just made a profit. Now, imagine the worst thing that can happen to your new company during the next few days, weeks or months. Think of downturns in the economy or of losing your one big account. Think locusts. Think plagues.

OK, now go spend your money.

When it comes to knowing what to do with the first dollars you earn, it's likely nobody has to tell you. Once the bills have been paid, that profit needs to go back into your business. But where exactly should you put it? Your money could go to stocking your inventory or hiring your first employee. You could upgrade your computer system or buy a more comfortable office chair. You could even spend it on advertising. The possibilities are limitless, but unfortunately, your budget isn't.

The average business doesn't even make an actual profit until after its fourth year, according to Brian Tracy, author of more than 26 business books, including The 100 Absolutely Unbreakable Laws of Business Success (Berrett-Koehler Publishers). "You have two years of scrambling, two years of getting [to the break-even point], and in your fourth year, you start to make a profit," says Tracy, who has spent more than 30 years speaking and consulting on corporate issues.

Chances are, if it takes four years to become profitable, you'll want to invest any extra money in the development of your company as soon as you possibly can. So, to crib from that old TV game show, the $64,000 question is: Where should you spend that first $64,000? Or, if you're not fortunate enough to have that much profit, your first $64?

Unfortunately, there isn't just one simple answer. If there were, of course, the secret would have been out years ago, and we would all be filthy rich. But some solutions for investing that first dollar are smarter than others. Here are just a few of them.

Build It Up
For a business, the term "infrastructure" can mean just about anything from inventory to new computer equipment to making sure you can transport goods from one place to another. But the bottom line is that improving your infrastructure improves your bottom line. Wherever most of your energy goes, that's likely the most vital component of your infrastructure. For Robin Kershner, that means inventory.

Kershner, 43, owns Fox & Hounds Ltd., an Alexandria, Virginia, company with seven employees. Her business designs fashionable pet accessories and, in 2002, the company brought in $1.5 million in sales, $100,000 of which was pure profit. If pet owners need a fancy dog bed, collar, leash or dog toy, Kershner's firm provides pet stores nationwide with all that and more. But if she gets an order and doesn't have product in stock, she risks losing money and her reputation.

Securing enough inventory has always been where her profits have headed-ever since a little disaster a few months into her business. "I remember the first Christmas trade show I went to," says Kershner, who launched her business in 1996. "I got more orders than I could handle."

It sounds like the type of problem you want, but Kershner sees it differently. "I didn't have inventory in stock to ship, and it took time to get orders out the door, and people canceled," she says. "Having inventory in stock and being ready to ship the next day is the best way to make people happy and increase your cash flow."

Kershner was also smart not to expand her inventory too quickly and incur more costs for order shipping and storing. She began by offering collars, leashes and bedding; it's only this year that she's diversifying into pet carriers, toys and other novelty items, such as squeaky toys.

Of course, you may have plenty of inventory, but if your dying computer or transportation problems are threatening your firm's efficiency, then that's also a problem in your infrastructure. Or maybe you have a phenomenal product, but you lack customers.

"One thing that can help is to invest a little of your money into promoting your business. Almost every business can use some kind of public relations," says Fred Siegel, a New Orleans financial analyst who owns his own investment firm, The Siegel Group, and whose radio show, Talking Money, is heard throughout much of the South on CBS Radio. Advertising is where Siegel says the first profits should go-after paying the bills and investing in your personal future with an IRA or your own individual 401(k), that is.

"Spend your money only on those things that will help you earn more money," says Tracy. "In other words, you reinvest-not in your office furniture or car or the premises, but [in] more products, better packaging, advertising, training and salespeople."

"Number-crunching is the best exercise for keeping you in line," says Kershner, who still hasn't laid carpet in the parts of her office space where visitors never tread. And when money comes in, she adds, "You have to carefully parcel it out-but then that's why you have a business plan, so you can see what cash you need and when."

Always consider your finances when you think of putting your profits into improving infrastructure, says Bob Oberstein, managing partner of Oberstein, Stock & Friedenthal LLP, a tax and accounting firm in Los Angeles. "If your books and records are shoddy, you may not know what you have," he says. "And in many cases, when businesses don't analyze their financial situation, they realize [later] that they might have made money if they had been keeping an eye on things." If you're dazed and confused when it comes to finances, says Oberstein, hire a professional to help with the books.

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Geoff Williams has written for numerous publications, including Entrepreneur, Consumer Reports, LIFE and Entertainment Weekly. He also is the author of Living Well with Bad Credit.

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This article was originally published in the November 2003 print edition of Entrepreneur with the headline: Pay Dirt!.

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