Making a profit for the first time is a huge milestone for any business. Whether it is a tiny one person operation or if you’re Amazon making a profit after 14 years in business, it’s kind of a big deal.
Hopefully, it doesn’t take your business over a decade to reach profitability. But when that magical day finally happens, what are you going to do with the money?
Profit is the money your business retains after all of your business’s expenses, costs, and taxes have been paid. In other words, it is how much your business gets to keep. It is the real measure of how well your business is doing.
Profits are yours to do with as you will. While smaller profits may not make that much of a difference, if you have had a really good year, you might find yourself with a lot of extra cash to spare. From this, you will need to decide what is the best course of action for this extra money, depending on where it might be needed, as well as your own goals in life.
4 Things to Do Once Your Business is Profitable
One of the big questions new entrepreneurs have is “when it is safe to pay myself from my startup”? Mike Michalowicz, author of Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine suggests that business owners pay themselves the moment the business is profitable.
This is a great suggestion. Small business owners or startup founders sacrifice a lot to grow their businesses. Oftentimes, this sacrifice comes in the form of their own salaries. But when you reach profitability, it is time to take your share. Keep in mind that it is never a good idea to take out all of the profits from the business.
But, you should try paying yourself something, anything, as soon as the business is profitable. This is especially important if you are a new entrepreneur.
Save and Invest
One of the options available to you is to invest your profits into a lifetime ISA from Wealthify (if you’re in the U.K.) or an Individual Retirement Account (traditional IRA, SEP or Roth) account with Betterment if you’re here in the U.S.
As a self-employed individual, you do not have the luxury of retirement options provided by an employer. This means that if you haven’t saved money on your own, you may have trouble getting by when you retire.
IRAs can help you save for retirement and they also provide tax benefits. SEP (Simplified Employee Pension) IRAs are particularly advantageous for entrepreneurs. These accounts allow the saver to contribute much more than Traditional and Roth accounts.
The maximum contribution for business owners is 25% of his or her net income, not to exceed the maximum contribution limit of $58,000. This is much more than the $6,000 ($7,000 if you’re age 50 or older) that you can contribute to a traditional or Roth IRA.
An ISA (U.K. only) will allow your money to grow over a longer period of time. The lifetime ISA is used either for the purchase of a first home or for later life once you retire. Not only could this potentially help you to get onto the property ladder but, if you already own your home, it means extra money that may be incredibly useful once you reach retirement age.
Working as a self-employed individual means that your income is never really guaranteed. It can be incredibly reassuring to know that you have a little nest egg put aside for when you are no longer able to earn money directly yourself.
You also have the option to invest in short-term investments like stocks and crypto. Platforms like Robinhood and Coinbase offer a lot of help for those just getting started. Keep in mind that investing apps are great for basic investing. However, once your income and investing balances get high, you may want to consult a Certified Financial Planner or Investment Advisor. There are investment vehicles available for those with more investable assets.
Put Some Back into the Business
Another option you might consider is to put those profits directly back into your business. This could involve gaining more equipment, advertising your services that bit more, or even leasing a workspace solely for you to work from. On top of this, high profits, and greater client needs, may lead you to need to hire others to be able to accept as many contracts as possible. Although you could undertake the recruitment process yourself, this can be time-consuming, so you may also opt to use some of those profits to get a dedicated recruitment specialist to find employees on your behalf.
Here are some of the other places where you can reinvest funds in your business:
Marketing-Reinvesting into your marketing budget will ensure that you are attracting new customers and clients.
Business Improvements– Infrastructure, customer experience and equipment are just a few areas where you can allocate profits.
Your skillset-If you want to continue to grow your business and yourself, you may want to invest in your own personal and professional growth. This includes taking courses, attending seminars, and hiring a coach or consultant. These investments will pay dividends over time. As you grow, so does your business.
Reward and Celebrate
Most people work, either for themselves or an employer, as a means of funding their life, and lifestyle. When business is doing well, it may be appropriate for you to have a bit of downtime. This could involve taking a vacation with your partner or loved ones, redecorating, or renovating your home. Or simply buying an item that you’ve had your eyes on. Either way as long as you learn how to budget your profits effectively, spending a little money to treat yourself for all your hard work can be a great way to remotivate yourself for the year ahead.
Here are some other ways to reward and celebrate:
- Give bonuses to your team
- Give a “thank you” gift to your best customers
- Throw a small party or meetup
- Frame your first dollar
- Take your team or those you’ve helped you out to dinner
Gaining profits within your business, especially if it is your first year in business, can be a wonderful feeling. By working out how you can best use the money, either for your work, or a personal life goal, you can help yourself to feel more fulfilled. You’ve worked hard to earn those profits. Now it is time to use them wisely.