Pay Dirt! Finally making a profit? Put it where it belongs--back in your business. Our experts tell you how.
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Imagine you just made a profit. Now, imagine the worst thingthat can happen to your new company during the next few days, weeksor months. Think of downturns in the economy or of losing your onebig account. Think locusts. Think plagues.
OK, now go spend your money.
When it comes to knowing what to do with the first dollars youearn, it's likely nobody has to tell you. Once the bills havebeen paid, that profit needs to go back into your business. Butwhere exactly should you put it? Your money could go to stockingyour inventory or hiring your first employee. You could upgradeyour computer system or buy a more comfortable office chair. Youcould even spend it on advertising. The possibilities arelimitless, but unfortunately, your budget isn't.
The average business doesn't even make an actual profituntil after its fourth year, according to Brian Tracy,author of more than 26 business books, including The 100 Absolutely Unbreakable Laws of BusinessSuccess (Berrett-Koehler Publishers). "You have twoyears of scrambling, two years of getting [to the break-evenpoint], and in your fourth year, you start to make a profit,"says Tracy, who has spent more than 30 years speaking andconsulting on corporate issues.
Chances are, if it takes four years to become profitable,you'll want to invest any extra money in the development ofyour company as soon as you possibly can. So, to crib from that oldTV game show, the $64,000 question is: Where should you spend thatfirst $64,000? Or, if you're not fortunate enough to have thatmuch profit, your first $64?
Unfortunately, there isn't just one simple answer. If therewere, of course, the secret would have been out years ago, and wewould all be filthy rich. But some solutions for investing thatfirst dollar are smarter than others. Here are just a few ofthem.
Build It Up
For a business, the term "infrastructure" can mean justabout anything from inventory to new computer equipment to makingsure you can transport goods from one place to another. But thebottom line is that improving your infrastructure improves yourbottom line. Wherever most of your energy goes, that's likelythe most vital component of your infrastructure. For RobinKershner, that means inventory.
Kershner, 43, owns Fox & Hounds Ltd., an Alexandria, Virginia,company with seven employees. Her business designs fashionable petaccessories and, in 2002, the company brought in $1.5 million insales, $100,000 of which was pure profit. If pet owners need afancy dog bed, collar, leash or dog toy, Kershner's firmprovides pet stores nationwide with all that and more. But if shegets an order and doesn't have product in stock, she riskslosing money and her reputation.
Securing enough inventory has always been where her profits haveheaded-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 moreorders than I could handle."
It sounds like the type of problem you want, but Kershner seesit differently. "I didn't have inventory in stock to ship,and it took time to get orders out the door, and peoplecanceled," she says. "Having inventory in stock and beingready to ship the next day is the best way to make people happy andincrease your cash flow."
Kershner was also smart not to expand her inventory too quicklyand incur more costs for order shipping and storing. She began byoffering collars, leashes and bedding; it's only this year thatshe's diversifying into pet carriers, toys and other noveltyitems, such as squeaky toys.
Of course, you may have plenty of inventory, but if your dyingcomputer or transportation problems are threatening your firm'sefficiency, 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 yourmoney into promoting your business. Almost every business can usesome kind of public relations," says Fred Siegel, a NewOrleans financial analyst who owns his own investment firm, TheSiegel Group, and whose radio show, Talking Money, is heardthroughout much of the South on CBS Radio. Advertising is whereSiegel says the first profits should go-after paying the bills andinvesting in your personal future with an IRA or your ownindividual 401(k), that is.
"Spend your money only on those things that will help youearn more money," says Tracy. "In other words, youreinvest-not in your office furniture or car or the premises, but[in] more products, better packaging, advertising, training andsalespeople."
"Number-crunching is the best exercise for keeping you inline," says Kershner, who still hasn't laid carpet in theparts of her office space where visitors never tread. And whenmoney comes in, she adds, "You have to carefully parcel itout-but then that's why you have a business plan, so you cansee what cash you need and when."
Always consider your finances when you think of putting yourprofits into improving infrastructure, says Bob Oberstein, managingpartner of Oberstein, Stock & Friedenthal LLP, a tax andaccounting firm in Los Angeles. "If your books and records areshoddy, you may not know what you have," he says. "And inmany cases, when businesses don't analyze their financialsituation, they realize [later] that they might have made money ifthey had been keeping an eye on things." If you're dazedand confused when it comes to finances, says Oberstein, hire aprofessional to help with the books.
Stash Your Cash
It may be the last thing you want to hear, but the best way tospend 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 notcomplaining. He's a partner of Bridge Technical Solutions LLC,an IT staffing company, which he bought in June 2002 with JoeDevine, 42, who's also a partner. They've been growing theProvidence, Rhode Island, firm ever since. Bridge TechnicalSolutions brought in about $1 million in sales by the end of 2002,with profits of about $50,000-and the great temptation was to spenda lot of it as it came rolling in.
But they listened to their accountant and put most of theirprofits aside for the following (in this order): taxes, cashreserves and paying down debt.
Wright adds that just because your books say that your companyhas 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 ofreceiving payments from our clients," notes Wright."Profits don't necessarily mean ready cash. You have toplan for how your money is tied up and realize that even ifyou're profitable, you may not benefit from it right away interms of having money to spend."
Last year, Wright and Devine reserved about 30 percent of theiranticipated profits and put that straight into paying down theirtaxes. Then they each took out another 5 percent to help them catchup on their personal finances.
But usually, explains Wright, the partners kept whatever extracash they had on hand available "because in our business, cashrequirements are always rotating every pay period, and you neverknow when it's going to be another crunch time."
Dollars andCents |
So you've made your firstdollar, and you're trying to figure out what to with it. Ifyou're stuck, who better to ask than a banker? We asked RobinC. Paterson, senior vice president and chief credit officer ofAmerican Business Bank in Los Angeles, how he would suggestspending 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 tocapital, and it should be invested to ensure the second dollar andfuture growth of the company," he says. So if Paterson wasback to making his first buck, in an ideal world, here's wherehis cents would go:
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Get Help
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 AmericanBusiness Bank in Los Angeles with $50,000, each contributing$10,000. Then they raised the rest of their start-up capital untilthey had accumulated about $14 million.
That doesn't seem like a hardship, but when you'reopening a bank, $14 million isn't a huge amount. In their firstmonth in business, they lost $212,000; the next month, they wereanother $228,000 in the hole. Paterson, senior vice president andchief credit officer, says that for the first months when they werestill raising money, the five of them worked in an 8-by-10-footoffice with one desk and two chairs, and nobody drew a salary.
After they opened in 1998, it took them 13 months to make theirfirst profit of $2,365. "Once you've made that firstdollar, it's no longer a dream," says Paterson."You've become a real business. You've crossedover."
The priority for their profits was to bring in more employees."That's still our biggest challenge, to find good peopleto help us continue to grow," says Paterson.
In the beginning, of course, you may hardly be able to payyourself, let alone somebody else. Which is why employeerecruitment expert Clark Waterfall recommends nepotism. "Yourbrothers or sisters or in-laws have some free time, and you can paythem on the cheap, and they'll work out of your basement,"he says. "This can work for the very early stages of abusiness." 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 aboutfinding better talent, adds Waterfall, managing director andco-founder of Boston Search Group Inc., a Boston company thatrecruits executives and professionals in technological fields.
"Turning over employees across the growth curve of acompany is not a bad thing," explains Waterfall."It's like clothes. You don't wear the same clothes asa teenager that you wore when you were a toddler. You havedifferent needs [as your company grows], and very few employeeshave that much Spandex, or elasticity, in them."
Even with $14 million fueling them, these bank founders couldonly afford one teller when they really needed three, so theexecutives helped out when necessary. Because they only had oneteller, Paterson says, their bank couldn't offer all theservices you'd expect from a full-service bank.
And while they wanted to hire a full staff, they operatedconservatively and didn't hire a second teller until six monthshad passed and business was thriving. Nine months later, theyreached their magical number three. Admits Paterson,"We're in reactive mode when it comes tooverhead."
The Land of Milk andMoney
Today, American Business Bank manages $350 million in assets, andwhile Bridge Technical Solutions and Fox & Hounds aren'tanywhere near that level, the entrepreneurs behind both businessesfeel 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 andHong Kong to meet with her manufacturers, enjoys the travel thathas become one of the perks of her business.
Additionally, "I've been able to give bonuses andraises to the staff, which was wonderful," says Kershner."And we can do nicer things for the staff, like stocking therefrigerator with sodas."
In short, Kershner's business is thriving because she had alittle foresight in the beginning. She was cautious with her moneyand tried to see what the future could be with it. Thanks to herforesight, her future looks bright.
Be Good toYourself |
You might think it's arich man's world, but the point at which your company finallymakes a profit is not the time to start living high on thehog. "Making a profit after not making a profit for a longtime-it's like a drug to the brain," says BrianTracy, a prolific author and publice speaker on numerous businessissues. "There's a natural tendency to associate spendingor buying stuff with rewards-Christmas, birthdays, getting anew car. Sometimes entrepreneurs will take an expensive trip; oftenthey'll buy a house. It's a very heady thing, to make yourfirst profit." Of course, that doesn't mean you can't be good toyourself-just remember to do it within reason and, evenbetter, make sure there is a reason. James Wright, presidentof Bridge Technical Solutions LLC in Providence, Rhode Island,fondly recalls blowing a significant wad of cash on a big holidaydinner last December. "We went out with my partner's wifeand my girlfriend," says Wright. "But it wasn't justabout pampering ourselves. It sent a [positive] message to mypartner's wife. Here are two guys who feel comfortable to dothis and can talk positively about their business. It was importantthat we did that." But going out for dinner every night or every week? That may notbe such a good idea. "Now that you have won, it'simportant you don't lose," says Tracy. "I have afriend who is an entrepreneur. He bought a BMW, a $40,000 car, andthe next month his business took a dip, and he went into a completepanic. A few months later, his business was gone. Once you put thecash in a new car, you can't get it back." |
Geoff Williamsmakes a living as a full-time freelance journalist and is sometimeseven profitable.