Saying No to Profits: Put Income Dollars to Work First
Photo by Alexander Grey on Unsplash
If your small business generates mostly extra income for you, then make that income work harder for you.
Many small business owners and solopreneurs also have a “day job.” That 9-5 with all the cushy benefits is what pays the rent, puts food on the table, and keeps the lights on. Indeed, for many of these startups, it is the financial basis that allows the small business to exist.
Now, I know that this is the one thing that the pundits, YouTubers, venture capitalists, and every shark on Shark Tank hates to hear; they want the people they work with to be 100% invested in the business. Those folks are also at a very different stage in their business ownership; and more often than not, they forget how they started. So, my advice to almost every small business owner in this position is to keep that day job.
Many small business owners are even in the position to not really need that extra income. They started the business less from need, and more out of curiosity so that extra income is more of a nice perk. Likewise, if your profits suddenly jump (the famous hockey stick effect), then you are also in the enviable position of too much income.
If that’s you, then this article is for you.
A Word of Caution about Business Profit Spending
I’m not an accountant or bookkeeper and I’m not providing certified financial advice. I’m just proposing an interesting option that I have personally taken in the past. In my case, it has paid handsome rewards and so I’m suggesting it here as an option. However, before you do this, you should probably speak to more specialized experts about it as well and follow their advice.
Ok, now that we have that out of the way, we need to settle what I mean by extra income. This is business income that remains after all the business expenses and allocations have already been deducted. Don’t forget to budget for benefits, taxes, licensing, etc. The bottom line is that you first need to cover the expenses of running your business.
After expenses, I also believe that extra funds should be reinvested in the business whenever possible. Invest in new equipment, services that grow the business, market research, customer/client development, and whatever else will generate growth. All these things need to be budgeted for first, before we consider what is left.
Those remaining funds are what I’m talking about. I’m referring to what you might spend on lavish restaurants, that extra night in Vagas, massages, upgrading the car to something foreign and ostentatious, or insisting on being the high bidder at your church fundraiser. If you are spending your extra business income on things that are more frivolous than necessary, then there is another option.
Put that Extra Money to Work for You
What if instead of spending extra business income you invested it? Let me be more direct: instead of taking any extra funds as income, you decide to invest it in the stock market or other investment vehicles. What if you made investing a habit and a regular allocation for your extra business income? Every extra dollar is invested, period.
So, if you have extra business income, which is often also the case when you also have a day job, then you can do just that. You don’t need to wait either, you can implement this as soon as you start too. If this is an option, it is a fantastic opportunity to grow your wealth well beyond what the business can generate. If you do this from the start and stick with it, then think of what this can mean when your income is $10K per month, or even $50K!
That extra money can now grow on its own. As long as you make sound, conservative investments, it will grow much faster than if it was just sitting in a cash account. If you absolutely need to generate income from it, you can even invest in high-dividend paying stocks, so that you will receive regular payouts without impacting your original investment.
You can even be more creative with more aggressive investment vehicles, but this is not my area of expertise. As I said, I am no financial advisor, so I now defer to experts who do this for me. However, when I was first starting out, I opened up a personal brokerage account and did this on my own at very little expense.
It can be done, but more importantly, it has many advantages:
It keeps you from spending your extra income on frivolous things
If you have never invested, this is a great way to start
It may clarify how you run your business, ensuring that you aren’t just covering expenses, but working to generate profits too
It generates a sense of accomplishment beyond the business itself
It can have tax advantages since you are not drawing the income directly – talk to a specialist about how to do this properly
It can significantly increase your business income over time
If necessary, that additional income can be reinvested in the business for greater impact in the future (a possible alternative to seeking VC funding)
With some planning, these investments can be protected from lawsuits and asset claims – talk to a specialist
Speaking of specialists, you will be surrounding yourself with experts that you will need as your wealth grows over time.
It’s been said already, but making this a habit in your life can change your life. It can be the doorway to changing your mindset about wealth. It can change your priorities about everything you do in life concerning money.
There is no Overnight Success
OK, now that we’ve dreamed a bit, let’s bring this back down to today’s reality. None of this is possible without extra income from your business. The business does need to generate positive income for you to be able to invest any extra funds. It should also be noted that this will not generate massive amounts of wealth overnight. This is a long-term plan.
As a long-term plan, though, it also gives you time to learn from it and to fine-tune it. When it comes to investing, long time-windows are your friend. I suppose an extra benefit is that implementing this can help calm things down a bit. If it’s long-term, then growing the business may not need to be rushed either. This can be very liberating.
That said, you don’t have to wait a long time to implement this either. As a matter of fact, you can implement this from the time of your first sale. As long as you are covering your expenses, your can set aside anything above that towards investing. You can literally start with pennies in profit. Just set them aside and let them accumulate in a separate account just for that purpose.
Once you have enough in the account to invest, you start investing – that is what I did when I started and was just scraping by. Purchasing stocks or other investments is not something you need to do every day. You can do it at the end of the month, or even quarterly. Just put it on your calendar to do your investing at a future date.
By the way, you can completely automate this with software too. Several apps will do this for you like Acorns, SoFi, Webul, and others. These will automatically shave off a little bit of each transaction and automate the purchasing of investments. I’m not exactly a fan of letting an app make investment decisions for me, but it is another option for those who really don’t want to think about it.
Whatever option you choose to invest the extra income from your business, always remember that this is a long-term plan. That means that you shouldn’t spend all your time checking up on your investments – it will take time for your wealth to grow. The stock market always goes up and down, but there is one truth that has held for over a century: over time the market continues to go up – yes, even through the Great Depression.
Conclusion
I must confess that I stopped doing this several years ago and I have not restarted. This is because when COVID-19 arrived, my extra income completely disappeared. I know many small business owners who have experienced the same difficulties. I simply wasn’t prepared for that kind of shock to my business models.
However, since I had been investing this way for decades, I also had a sizeable cushion. Honestly, I didn’t want to spend my investments to reinvest in my business, but I was more concerned about the business dying out, and since these were all profits and investment income generated from the business, it was only fitting that I use it to reinvest in the business.
That is one of the many benefits of having this cushion. Unlike retirement investments which can also be tapped in emergencies, a stock portfolio is much more liquid and has fewer penalties for early withdrawals. So, while I had to put my plan on hold for a few years, I was able to keep the business running without interruption. I was even able to rebuild important processes, pivot where needed, and invest in some infrastructure that should make it more robust and resilient in the future.
That said, I probably should have returned to the plan sooner. We’ve been out of COVID-19 for some time already, and I have delayed funding my own investment plan. I suppose writing this article is my realization that it’s time to start up again. If you are in the same position, with extra income from your business, you may want to consider doing the same.
