Pay Dirt!
Stash Your Cash
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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. Content Continues Below
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
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Originally published in the November 2003 issue of Entrepreneur Magazine
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