When Thelma and I were first married, we were both earning good salaries. We put some money aside each month, and soon we were able to move from our maisonette straight into a big family house.
We missed out the stepping stone of buying a smaller house first, and it stretched us financially. But we felt confident we could do it.
We were both in our 20s, and the alternative was to spend on amazing holidays, eating out regularly and partying. It would have been fun, but we preferred to take a long-term view.
I sometimes think about the choices we made then when I’m talking to clients about what they should do with any spare cash they have in their business. If you’re profitable, it’s a decision you’ll have to take sooner or later.
The choice is whether to take all or some of it out of the business to spend on yourself and your family, or leave it all in the business and invest it right back in.
After a good year, it can be tempting to take out money out of your business to use personally – and that’s not necessarily the wrong choice. Perhaps you need to take money out of the business to move house because of a growing family. Or do up your home – often a wise investment. Everybody has important priorities.
But you should never, ever do it without first gaining a proper understanding of what funding your business will need over the next few years. It would be a terrible mistake to drain your business of money it needs to grow (and make you even more money….).
“Spare” cash must really be spare – not money your business needs.
The key is good financial planning. If you know where business is heading and what kind of investment you are going to need to get it there, what to do with your spare cash will be decided for you.
There is another argument for leaving the money in your business. Not only will leaving money in place make the company stronger – it will make it look stronger, too, when customers or suppliers do credit checks.
Credit companies want to see the value of the business increasing, and that means they want to see cash and resources growing. If you take out all your profit, from a financial point of view it’ll be as if the company hasn’t made any progress from one year to the next.
In a personal context, everyone agrees it’s better to put some money aside if possible. It’s the same for your business. You will be more comfortable knowing that there is some cash in the bank to cover your business in the case of emergency, or to take advantage of opportunities that arise.
So try and act strategically.
It was certainly the right approach with our house, all those years ago. The temptation to spend the money on the ‘here and now’ was massive, but 30 years down the line, our investment paid off. We’re still in the same house.
And with the kids having flown the nest we’ve now got some spare cash again.
If you want help determining what kind of cash your business will need to grow over the next few years, let’s talk. We can help you set clear goals for your business, and create a realistic budget to achieve them.
You will know exactly how much money you can take out of the business for yourself and for your family, and how much you need to leave in your business to make sure it grows…
