Join us at Entrepreneur magazine's Growth Conference, Dec. 15 in Long Beach, Calif. for a day of fresh ideas, business mentoring and networking. Register here for exclusive pricing, available only for a limited time.
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.
Stash Your Cash
It may be the last thing you want to hear, but the best way to spend your profit is not to spend it. "Cash is to a business [as] oxygen and blood are to the brain," Tracy explains. "You must conserve your cash at all costs."
That's what James Wright, 36, did, and he's not complaining. He's a partner of Bridge Technical Solutions LLC, an IT staffing company, which he bought in June 2002 with Joe Devine, 42, who's also a partner. They've been growing the Providence, Rhode Island, firm ever since. Bridge Technical Solutions brought in about $1 million in sales by the end of 2002, with profits of about $50,000-and the great temptation was to spend a lot of it as it came rolling in.
But they listened to their accountant and put most of their profits aside for the following (in this order): taxes, cash reserves and paying down debt.
Wright adds that just because your books say that your company has a $5,000-or $50,000-profit, it may not all be in your account. "Our money is tied up in paying off payroll in advance of receiving payments from our clients," notes Wright. "Profits don't necessarily mean ready cash. You have to plan for how your money is tied up and realize that even if you're profitable, you may not benefit from it right away in terms of having money to spend."
Last year, Wright and Devine reserved about 30 percent of their anticipated profits and put that straight into paying down their taxes. Then they each took out another 5 percent to help them catch up on their personal finances.
But usually, explains Wright, the partners kept whatever extra cash they had on hand available "because in our business, cash requirements are always rotating every pay period, and you never know when it's going to be another crunch time."
|Dollars and Cents|
|So you've made your first dollar, and you're trying to figure out what to with it. If you're stuck, who better to ask than a banker? We asked Robin C. Paterson, senior vice president and chief credit officer of American Business Bank in Los Angeles, how he would suggest spending that first dollar of profit.
First, he corrects us, the idea is to invest, not spend. "That first dollar of profit is really your first addition to capital, and it should be invested to ensure the second dollar and future growth of the company," he says. So if Paterson was back to making his first buck, in an ideal world, here's where his cents would go:
Robin C. Paterson, 41, is an unusual entrepreneur. After all, how many guys do you know who have started a bank?
In 1998, Paterson and his four partners-Leon Blankstein, 44; Donald P. Johnson, 57; Robert F. Schack, 56; and Wes Schaefer, 52-pooled their money and co-founded American Business Bankin Los Angeles with $50,000, each contributing $10,000. Then they raised the rest of their start-up capital until they had accumulated about $14 million.
That doesn't seem like a hardship, but when you're opening a bank, $14 million isn't a huge amount. In their first month in business, they lost $212,000; the next month, they were another $228,000 in the hole. Paterson, senior vice president and chief credit officer, says that for the first months when they were still raising money, the five of them worked in an 8-by-10-foot office with one desk and two chairs, and nobody drew a salary.
After they opened in 1998, it took them 13 months to make their first profit of $2,365. "Once you've made that first dollar, it's no longer a dream," says Paterson. "You've become a real business. You've crossed over."
The priority for their profits was to bring in more employees. "That's still our biggest challenge, to find good people to help us continue to grow," says Paterson.
In the beginning, of course, you may hardly be able to pay yourself, let alone somebody else. Which is why employee recruitment expert Clark Waterfall recommends nepotism. "Your brothers or sisters or in-laws have some free time, and you can pay them on the cheap, and they'll work out of your basement," he says. "This can work for the very early stages of a business." But even though they're your relatives, don't hire them unless they can be professional.
Once your business starts to grow, then you can worry about finding better talent, adds Waterfall, managing director and co-founder of Boston Search Group Inc., a Boston company that recruits executives and professionals in technological fields.
"Turning over employees across the growth curve of a company is not a bad thing," explains Waterfall. "It's like clothes. You don't wear the same clothes as a teenager that you wore when you were a toddler. You have different needs [as your company grows], and very few employees have that much Spandex, or elasticity, in them."
Even with $14 million fueling them, these bank founders could only afford one teller when they really needed three, so the executives helped out when necessary. Because they only had one teller, Paterson says, their bank couldn't offer all the services you'd expect from a full-service bank.
And while they wanted to hire a full staff, they operated conservatively and didn't hire a second teller until six months had passed and business was thriving. Nine months later, they reached their magical number three. Admits Paterson, "We're in reactive mode when it comes to overhead."
The Land of Milk and Money
Today, American Business Bank manages $350 million in assets, and while Bridge Technical Solutions and Fox & Hounds aren't anywhere near that level, the entrepreneurs behind both businesses feel they're on solid ground.
Wright is careful to make sure he earns enough to treat himself, and Kershner, who routinely jets off to places such as London and Hong Kong to meet with her manufacturers, enjoys the travel that has become one of the perks of her business.
Additionally, "I've been able to give bonuses and raises to the staff, which was wonderful," says Kershner. "And we can do nicer things for the staff, like stocking the refrigerator with sodas."
In short, Kershner's business is thriving because she had a little foresight in the beginning. She was cautious with her money and tried to see what the future could be with it. Thanks to her foresight, her future looks bright.
|Be Good to Yourself|
|You might think it's a rich man's world, but the point at which your company finally makes a profit is not the time to start living high on the hog.
"Making a profit after not making a profit for a long time-it's like a drug to the brain," says Brian Tracy, a prolific author and publice speaker on numerous business issues. "There's a natural tendency to associate spending or buying stuff with rewards-Christmas, birthdays, getting a new car. Sometimes entrepreneurs will take an expensive trip; often they'll buy a house. It's a very heady thing, to make your first profit."
Of course, that doesn't mean you can't be good to yourself-just remember to do it within reason and, even better, make sure there is a reason. James Wright, president of Bridge Technical Solutions LLC in Providence, Rhode Island, fondly recalls blowing a significant wad of cash on a big holiday dinner last December. "We went out with my partner's wife and my girlfriend," says Wright. "But it wasn't just about pampering ourselves. It sent a [positive] message to my partner's wife. Here are two guys who feel comfortable to do this and can talk positively about their business. It was important that we did that."
But going out for dinner every night or every week? That may not be such a good idea. "Now that you have won, it's important you don't lose," says Tracy. "I have a friend who is an entrepreneur. He bought a BMW, a $40,000 car, and the next month his business took a dip, and he went into a complete panic. A few months later, his business was gone. Once you put the cash in a new car, you can't get it back."
Geoff Williamsmakes a living as a full-time freelance journalist and is sometimes even profitable.