What to Do With Your Profits

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:

  • Sales (marketing, hiring employees), so you can develop your business: 60 cents
  • Infrastructure (customer service, communication systems), so you can keep your business: 25 cents
  • Product development (new products and services), so you can maintain a competitive edge: 8 cents
  • Technology (enhancing what you already have), so you aren't left behind: 5 cents
  • Professional services (accounting, legal), so you can keep everything legal and under control: 2 cents
    Grand total:$1.00

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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