The Wealth Spa

Prioritizing Your Profits

Posted on 24. Jan, 2008 by Elizabeth Potts Weinstein in Finance

As your business starts to produce an income, how should that money be spent?  Invested back into the business, for growth?  On personal expenses?  When do you start paying yourself a salary?  When should you start your retirement plan? 

Allocating that next dollar of profit is challenging.  On one hand, you want to grow your business as fast as possible.  But you also want to enjoy your profits (finally!) and start to up-level your lifestyle.  You also know you "should" be saving for retirement.

I recommend you start to triage your allocations.  As you are able to pay for the first category you can move on to considering expenditures in the next category.  For example, once you have your minimum expenses covered, you can start investing in business growth and saving for retirement. 

1. "Must" have expenses. 
   1. Minimum Personal Expenses:  shelter, utilities, food, gas, loan payments, insurance.
   2. Minimum Business Overhead:  rent, payroll, licensing, operational costs, insurance, taxes, inventory.
2. Maintenance & early growth.
   1. Personal Expenses:  clothing, household goods, toys, personal care, discount travel, insurance, gifts, charitable donations. 
   2. Business Growth:  promotion & advertising, networking, staff, outsourcing, new products and services.
   3. Retirement Savings.
3. Lifestyle & Growth
   1. Lifestyle Expenses:  luxury vacations, 2nd home, luxury automobile, designer clothes, country club membership, extensive charitable causes.
   2. Rapid Business Growth:  research and development, new technologies, staff, branding, business real estate, additional business ventures.
   3. Wealth Building: real estate, equities, alternative investments, college savings funds, additional retirement savings. 

But be aware — these choices depend upon you personal priorities and goals.  You may not be willing to "give up your coffee" today for a million dollars in 40 years.  That’s not right or wrong.  It’s a matter of personal values.  The important decision is to always be making a conscious choice of what you are taking and what you are giving up in response. 

Grow Up! First Step
Do you know the average monthly overhead of your business?  Is that figure a real number or just a guess? 
Use your bookkeeping software to find your average monthly expenses — to determine how much it costs each month just for your business to stay afloat.

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Tags: Cash Flow