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.
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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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