Author: Aisha Jones Scheffel Added: October 24, 2008
Copyright (c) 2008 Aisha Jones Scheffel If you read books by personal finance gurus such as Suze Orman, David Bach, or Jean Chatzky, you know that their number one rule is to pay yourself first. How can this personal finance success principle be translated into a small business finance success principle? It starts by asking a simple question. What are you paying your business? I know you are thinking that the question doesn't make sense, your business pays you, but hear me out for a second. What you pay your business is the amount you reinvest in your business. Many small business owners withdraw all of the profits and leave very little to continue to grow the company. Why you should reinvest your profits? For simplicity sake, suppose you make profit of $1,000 in February. You could take the full $1,000 from the business and go buy a small LCD TV screen for your bathroom. Yes, you would enjoy not missing a second of American Idol or the NBA playoffs due to unfortunate bathroom breaks, but what would happen if you reinvested 50% or $500 of the profits. You take the $500 and reinvest in marketing, which yields an additional customer resulting in an additional $1,000 in profits per month. In our simple example, in three months you would be making 4 times as much money! How to determine what you are reinvesting? On your financial statements, look at your statement of cash flows at the financing activities section, you will most likely see an "Owner's Draw" or a "Dividends" line item. That is the amount you have paid yourself. To determine your reinvest rate, calculate the following: Net income - Dividends (or owner's draw) divided by net income Example: Net income = $1,000 Owner's Draw = $500 Reinvestment rate = ($1,000 - $500) divided by $1,000 = $500 divided by $1,000 = 50% What are World Class Companies Reinvesting? We all want to operate a world-class company, let's see how you compare to the top name brands in the world: - Google = doesn't pay out any dividends, all money is reinvested - Starbucks = doesn't pay out any dividends, all money is reinvested - Nordstrom = 81% of profits are reinvested - Whole Foods = 39% of profits are reinvested - Apple = doesn't pay out any dividends, all money is reinvested - Disney = 85% of profits reinvested - American Express = 81% of profits reinvested Some ideas to make reinvestment automatic: - Pay yourself ad employees salaries or wages, everything else goes into the business. - Set a distribution policy, like 25% of profits are paid out to the owner. Have your bookkeeper or accountant make sure that they only pay only the 25%. You want to put the reinvestment money towards the activities that are going to give you the biggest bang for your buck. Some examples: marketing, advertising, a new salesperson, an assistant, facility improvements, training in new skills, or a computer system and software to improve productivity. To get your business to grow, maybe it's time you increase what you are paying your business. Don't you think it deserves a raise!
--- Aisha Jones-Scheffel is "The Doctor CFO". Get her FREE SPECIAL REPORT, "7 Never Before Told Ways to Make Your Practice Stop Bleeding Money (That Has Nothing to do with Insurance or Billing)" and her FREE money management how-to tips at http://www.DoctorCFO.com .
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