One of the greatest opportunities missed is business owners not getting their profits out of the business.
All the hard work in starting your business and developing an attractive offering that meets the needs of your target market amounts to nothing if you don’t withdraw profits.
The solution to this, and one of the great wealth secrets of the successful, is The Takeout Policy.
Having excess cashflow rolling around in your business operating accounts is akin to ‘lazy money’.
I’m not talking about marginal businesses that float within $100 of their loan limits day to day. Or businesses that re-invest their profits for growth. Or start-ups focused on fast scale and exit.
The relevance of the Takeout Policy applies to the many established businesses that are producing solid and consistent operating profits.
Shouldn’t I leave my money in the business?
Yes if you are a start-up and need early profits to survive, grow rapidly and exit. Yes if you are rapidly expanding your business, adding new divisions or entering new markets. Yes if you acquiring businesses or intend to start new ones.
No if you are like most small and medium businesses. You are established, drawing a market salary, have a static staff level, a stable customer base and a satisfactory ‘cash float’ for working capital. You are profitable.
Businesses in this second group I encourage to adopt The Takeout Policy.
How does The Takeout Policy work?
The Takeout Policy explained:
1. Leave a sufficient ‘float’ in the business for working capital
2. Put aside a sufficient tax provision (based on your tax rate applicable to earnings)
3. Only apply the Takeout Policy to a profitable period of trading (quarter or half-year)
4. Should you incur a trading loss in a period, that trading loss must be recouped next period before future Takeout can be withdrawn
5. Withdraw trading profits (after tax provision) in arrears after you have collected from your customers
6. Invest in capital appreciating assets
What about cashflow?
Leaving a ‘float’ in the business provides working capital with sufficient funds to pay your wages, trade creditors and general operating overhead.
This is critical to your peace-of-mind in knowing that there is enough money in the business to pay the bills.
It also provides confidence to transfer profits out of the business safely and systematically.
Cashflow is supported by the timing of The Takeout Policy. Takeout is in arrears. That is, profits are taken out 90 or 180 days after the trading period when you have collected debtor monies from your customers.
The Takeout Policy acknowledges the need to convert debtors to ‘cash at bank’.
Is it risky?
If you strictly follow the rules of The Takeout Policy, it is not risky.
If you make a loss for the period, there is no Takeout Policy for that period.
Losses from a previous period must be recouped in the next period before any future Takeout applies.
Takeout should be invested in capital appreciating assets.
Worst case scenario, should you have a major setback in the future – you sell some assets. These assets in most cases will have appreciated over time. As a result, you will most likely be in front having invested in assets over time, rather than having cash rolling around in your bank accounts.
How do I get started with this?
Review your working capital requirements in conjunction with the risk profile of you and your business partners.
Assess the ‘cash reserve’ you want to leave in the business to cover working capital needs.
This might be a month’s wages. Or a month’s trade creditors. It could be a month’s total payments.
Whatever the amount, quarantine this reserve before commencing The Takeout Policy.
If this reserve needs to be saved for, delay the commencement of The Takeout Policy until this reserve is reached.
Once you have a sufficient cash reserve, set up The Takeout Policy for implementation.
Implementing The Takeout Policy
Set the frequency of Takeout based on your business and any seasonality. If you carry debtor balances for a long period of time, or are subject to seasonality in your market, look at the timing of Takeout.
Typically, the best frequency I’ve found is either 90 days or 180 days in arrears. Quarterly or six-monthly seems to work best.
Ensure that you have accurate and timely financial reporting. If you are to withdraw profits, you want to make sure that your profits have been calculated accurately.
I recommend setting up a separate interest bearing bank account for you to transfer the tax provision on profits. This will keep your Accountant happy and you will sleep well knowing your taxes are provided for. The tax bill will inevitably come, so there is no point pretending it won’t.
Set dates in your calendar for the transferring of tax provision and Takeout. Or schedule it to follow a Board or Management Meeting. This discipline ensures Takeout happens.
What can I expect over time from The Takeout Policy?
Applying The Takeout Policy on a systematic and disciplined basis over time will dramatically improve wealth creation.
Through investing in capital appreciating assets over a period of time, you benefit form ‘time in the market’. Time in the market is what allows your assets ‘time to appreciate’ in value.
The ability to invest in capital appreciating assets over several decades rather than ‘leaving profits in the business’ until selling the business or retirement is key.
If you wait until you sell the business or retire, you then have limited years for the capital assets to appreciate in value.
The key to wealth creation is investing consistently over time in quality assets.
Have fun with this. Smell the roses in making those Takeout transfers. Getting profits out of the business is the final step (some may say the most important step) in recognizing and crystallizing the reward for all your effort.
Let me know if you are ready to make the commitment to The Takeout Policy in your business.
I really want you to start creating sustainable success in your business and life. Simply check out my FAQs videos HERE on what business owners most commonly ask about sustainable business success. If they help you, simply sign up and get the other 20x videos free.
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Cheers, Darren K Bourke