After finalising the costs required to keep your business in operation (wages, debts, licences, taxes, etc.) you may well think that whatever is left can be put straight back into your pockets. This is basically true, in a sense, if you are the sole owner of the business. It can also be easily achieved in partnerships by bumping up your salary or paying dividends.
Taking all profits and any more than a modest wage out of your business is, however, a very foolish mistake. Here is 5 key reasons why every Sydney accountant would tell you the same thing:
- There is an old adage that everyone knows: you have to spend money to make money. This is a saying that is heard universally around the world and this is because it is universally true. Whether you are a freelancer working from home, or a business with 10 employees, there is no question that this is the case. It’s possible to keep relying on the foundation you have, but what happens if your only customers drop out of the contract?
- Reinvesting your profits will give you a competitive edge. In your first year it’s likely that you will be struggling to get clients and to develop yourself as a business. This is because there will be countless other small businesses in the same boat. Reinvesting in your online marketing or in a greater number of employees will enable you to build a greater customer base and start operating at the next level.
- Revenue and profits are not the same source of funds. If you treat what your company earns as money that you can spend then you will find yourself short on cash flow. If your office needs supplies and this is how you operate then it will have to come out of your back pocket. If trade is slow one month and you have squandered the business income on a nice car then there won’t be a fund to prop it up in the short term. If you only take a reasonable bite of the profit as a salary, you will be prepared with business funds when the unexpected happens.
- Earn more later by reinvesting now. As a small business it is difficult to picture where all the money will come from at times. This makes it tempting to take all of the profits out of the business but doing so will not leave any room for growth within your company. Reinvestment needs to be considered as preparation for a greater income in the future.
- It’s important to remain reliable. If you are unable to pay bills for any reason then you will lose support systems and the company will be punished for this. Similarly, if you are required to demand payment on an earlier date one month, you may well lose customers. Being a reliable and consistent company is vitally important but this will not be the case if there are no cash reserves to back you up.
So think hard before you decide to splurge on that holiday before reinvesting in your business. In the long run, it’s important that you keep feeding profits back into your company, in order for it to not only survive, but to be successful.