Money is simply tickets to opportunity.
And that’s why money is so important.
In assessing money around business, I split money into two categories.
Remunerating yourself for fulfilling your operational role in the business is critical. Think of it as a good commercial remuneration package you’d pay an MD or GM to run the business for you. Now deduct that remuneration package and calculate what is left as profit. This amount of profit is the real commercial return you’re making as an investor/shareholder in your business.
Think of two income streams. You receive remuneration (salary and/or drawings) for your operational role plus a commercial return as an investor.
Commercial Remuneration – Operational Role
Typically, a remuneration for operational roles is taken by business owners. But not always commercially. Often owners feel guilty about drawing money from the business or their accountant tells them only to take a small salary because of tax.
On the assumption that your business cashflow is sound, you should take a commercial remuneration for your operational executive role. It can still be treated correctly for tax purposes split into salary and drawings. This amount might be $100K-$150K for small-business and $180K-$300K for a medium-business. Ideally it should be an amount you can live off comfortably.
Return on Investment – Investor Role
It is important to know the profit you are making on the business as an investor afteryou have been paid a commercial remuneration for your operational role.
The return on investment is the profit achieved as an investor.
What is your investment return in dollars for your business?
What percentage is your investment return on sales revenue?
How does your return on investment compare to other businesses in your industry and/or businesses of a similar size?
Business owners must know the answer to these three questions and I ensure my clients do.
Getting the Money Out
The big weakness for most SME Owners is that they don’t get profits out of the business.
The question I ask is “Given the risk, effort and effort you’ve taken to establish your business; what is the point if you don’t get the money out?”
There is no point.
- Would you grow wheat and fail to harvest the crop?
- Would you farm cattle and not go to market?
- Would you manufacture products and never sell them?
If you don’t get the profits out of the business, you haven’t really made any money.
If you don’t make profits and take it out of the business, you don’t have any tickets to opportunity.
You just have a job.
Before some owners jump up and down about reinvesting profits to grow the business, I make a distinction here.
The profits must be measured, reported and declared and then reinvested back in the business. But only after the analysis of profits in quantum and as a return on investment. In addition, alternative uses of the profits should be considered. The ticket to opportunity here is reinvestment in the existing business but only if it is the best opportunity for the money.
Tickets to opportunity include:
- Reinvestment in existing business
- Debt reduction
- Investment in capital appreciating assets such as property and shares
- Buy or start up other businesses
- Lifestyle/Private (discretionary)
Investment in a diversified range of these opportunities systematically over time leads to greater opportunities if your business (and investments) are successful.
Sustainable success is about getting the profits OUT of the business in a safe, predictable and systematic manner AND investing in opportunities.
And finally, there are three things that really bug me about money and business.
One is having lazy money in the business whereby money sits in bank accounts or accounts receivable and fails to convert to tickets to opportunity.
Two is internal staff and external advisors who are overly cautious or neglectful in recommending business owners not take profits out of the business. There are methodologies I use to calculate a satisfactory cashflow reserve that the business needs to carry in working capital. Beyond that reserve being maintained, the profits must come out.
Three is business owners that don’t have a predictable and systematic basis for getting profits out of the business. I use a customised Takeout Policy with clients to ensure this happens.
Get the profits out of your business and convert them into tickets to opportunity.
Show me the money!
Darren K Bourke.
PS: Speaking of money, here is a picture of me and other SME Owners at this month SME HUB Breakfast discussing our very own Money challenges!
To start creating sustainable success in your business and life, download a copy of my eBook 'The Success Algorithm' which details my process to work less and earn more. You can get a free copy on the Giveaways page of my website. Plus some bonus videos from my Fourth Moon video series to reach your goals sooner!
All the best,
Darren K Bourke