Safeguarding Your Business Profits
After all the work and investment that goes into building a successful business, the day you start to realize a decent profit makes you feel on top of the world! The primary objective in running a business is to make money from it – even if that’s not the most important aspect to you personally and you love the challenge and the nature of the work first and foremost, you still need to make a profit to stay in business. Having gotten to the stage where the books are in the black and the profits are starting to roll in, how do you make sure that your hard-earned cash is put to best use?
The urge to splurge
Unless you have a superhuman level of self-control, you’ll probably want to buy yourself and your loved ones a few treats. A special night out or a weekend away, new clothes or hobby equipment, or maybe a luxury purchase for your home are all likely ways that you’ll want to give yourself something back from your business. There’s nothing wrong with that idea, after all, you should be able to enjoy the fruits of your labors. However, there are several considerations you need to make before getting too carried away with your spending spree.
Where is the money coming from?
You obviously know how the profit has been generated, but you need to consider how your business is set up and how you are paid out of the profits. For instance, do you get a salary and a percentage of profits, or dividends? You should discuss the structure of your business with your accountant to make sure it is positioning you in the most advantageous place regarding tax and debt liabilities. If you would have to take responsibility for the costs of the business taking a downturn and be liable for its debts, you need to take account of this, and make sure you are covered for such an eventuality.
Where is the money going to?
Whenever you pay out for anything, it’s worth checking whether your purchase could be legitimately set against your tax return as an expense. That doesn’t mean trying to pass off personal purchases that have nothing to do with your business, but you might be better off leasing a car through your company than buying one privately for example. It’s always worth checking how to gain the best advantage, as long as you stay within the law – if there’s one agency renowned for its tenacity, it’s the IRS!
When you start to make a profit, your first step before deciding how to spend the money you’re making is to clear any debt that may be outstanding. Depending on how you have structured your finances, your business may be showing a profit on paper, but still be liable for repayments to investors for instance. If this is structured as a repayment plan over a defined period of time, you can still take any surplus profits for your personal use. Or your cash flow may require you to have a reserve fund to cover any shortfall caused by slow-paying customers or other short-term drains on resources. Once your business liabilities are confirmed, look at your personal finances. If you have loans, credit card debts, or lease and rental agreements, make paying these off a priority. It will save you money, in the long run, to focus on clearing debt and avoid paying interest on what’s due. You probably want to make an exception for your mortgage, which is more of a high-value long-term investment; unless your profits are so impressive you can afford to clear it now!
Putting money back into the company
Many business owners choose to reinvest their profits back into the business, and this should be your next consideration. If you want to expand or improve your operations, then reinvesting some of your profits is a sound way to grow your business. The money you reinvest needs to be detailed precisely on your accounts to ensure your tax liabilities are accurate, or you will lose out; so don’t splash out on new tablets for all your staff without the expense being recorded and legitimized.
Once you’ve checked whether you need a reserve fund, cleared any outstanding debts, and decided how much to reinvest in your business, you can then relax and start choosing how to spend your money. Treating yourself is important, as it will give you a thrill to know that you are splashing out on something you truly desire as a result of your hard work and business acuity. However, if you want your money to work for you, you should consider investments. There is an extensive choice of different types of investment available, from high-risk shares to low-risk long-term assets, property investment, bonds, foreign exchange, cryptocurrencies, and many more. The most reliable returns will be in low-risk stocks, but these can take many years to achieve their full potential. High-risk strategies by definition increase the odds that you could lose your money, but you could try a middle road with swing trading strategies. These are specially selected shares that experts calculate are just about to make a significant swing to profitability, which could gain you better returns over a shorter time frame.
The complexity and intricacies of the financial world need experts to exploit them to their full advantage, and if you try and go it alone without seeking their advice, you’ll lose a lot of time on research, and you could well make the wrong choices. A financial adviser can guide you through your investments and make recommendations to suit your needs and aversion to risk, which is preferable to trying to learn enough to make sound decisions by yourself. Most importantly, your CPA should be more than just a number cruncher. They should be able to advise you as to the most efficient way to structure your business and how to get the best from your financial arrangements.
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