MBA1551 Are You Putting Too Much Money Back Into Your Business?

Hey Fidelity, how can I remember to invest every month?

With the Fidelity app you can choose a schedule and set up recurring investments in stocks and ETFs.

Huh, that sounds easier than I thought.

You got this?

Yeah, I do. Now where did I put my keys?

You will find them where you left them.

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Hey, welcome to the $100 MBA show, the preferred business podcast for those who don't want to waste time. That's why we deliver daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of the Hundred Dollar mba A a complete business training and community online. And in today's lesson you will learn Are you putting too much money back into the business? Most entrepreneurs love their business to death. They'll do anything to see it grow, to see it strive, to see it compete. So by default you are going to do everything you can to see it grow. And that means putting money right back into the business anytime you make a profit. A lot of businesses put all their profit straight back into the business. Anything remainder from all their expenses, they just pump it right back in. And you might be saying hey, that makes total sense Omar. That's how the business grows. What else am I going to do with that money? Well that's what we're going to discuss in today's lesson. Many entrepreneurs do not leave enough on the table for themselves. Whether it's a salary, whether it's a dividend, whether it's whether it's for a rainy day. They get into the habit when they start their business, putting every cent back into the business. And this continues for months, for years, even sometimes decades. Now this may seem like it makes sense, but you have to understand as an entrepreneur, you're investing a lot of time, your own money, your own sweat equity, a lot of stress, with the hopes of getting a payday, right? Getting paid back at some point. But that some point sometimes never comes. So in today's lesson we're explore how to start taking some of your profits and putting it aside for Yourself as the founder, what are your options? Whether it's salary, whether it's a dividend, whether it's taking some cash off the table. We'll get into it and why you'd want to do this. So let's get into it. Let's get down to business. Before I start today's lesson, I want to make a quick disclaimer. This is not financial advice. You should speak to an accountant. You should speak to an expert. You could speak to the nerd wallet guys over@nerdwallet.com I'm just going to share with you a perspective. Some things I learned along the way, some mistakes I made along the way, and some things that have been brought to my attention when it comes to this topic of what do you do with your profits, with your business? Do you pump everything back in? Do you take things out back to the founders, things like that? I also want to say that for a very long time, I was a big believer that if you're going to bootstrap your business, if you're going to grow and be competitive, you got to put everything you got into the business, whether it's your time or energy, but especially your money, to run a lean business so that every single cent that you have left over can go back into it. The issue with this is that as a founder, you could pay yourself peanuts and, and you could do this forever. And the problem is that that's not sustainable for a very long time. And even till today, to some extent, all my employees, every single one of them on my team, was getting paid more than I was. That's kind of hard to believe, but yeah, I had the absolute minimum salary as possible because I wanted all the profit as much as possible to go back into the business. For years I did this. But imagine doing this for your first year, your second year, the third year, the fourth year, after about five years living that kind of life, being so selfless for the business, it's just not sustainable. You can't continue to run a business like that when you don't get any fulfillment, especially financial fulfillment. You know, this is part of the game. The reason why you're into business is so you can be financially free, so you can afford some luxuries in life, so you can have an enjoyable lifestyle, some sort of standard with the hopes that, hey, you're gonna have this big successful business, whether it's successful because it has all these customers and you're running this thing and you have so many great teammates, or it's successful because somebody Buys it off your hands, all that kind of stuff. But if no one's buying your company anytime soon or you don't have a buyer in mind, then this is not sustainable. You can't continue to pay yourself peanuts, because what's gonna happen is you're gonna start resenting your business, and you're actually not treating one of the most important people on your team, which is yourself, the founder, or the leader. There's a big, big CEOs, and from big companies get paid millions of dollars. That's their salary. Okay? Now, I'm not saying to pay yourself millions of dollars. This is not what I'm saying. But what I'm saying is that you need to make sure that you take some money off the table once you're somewhat profitable, once your business is off the ground, you're past the mvp, you have a good amount of customers, you're able to grow the team. At some point, you got to start paying yourself a normal wage so you can start taking some of that wage and saving it for yourself, saving it for a rainy day, because business is unpredictable. Business might go down, it might get really rough at some points, and you need to have a safety net, a financial safety net for yourself so you can be able to eat, breathe, live, have a roof over your head. Most founders that I speak to in their first few years, they're paycheck to paycheck. They are really on a very thin line financially, and you shouldn't be living like that. You should be a little bit comfortable so you can think creatively, so you can feel confident in your business, and. And sometimes you don't need to make that extra higher. You actually need to take that funds and pay yourself something a little bit more reasonable. So that's the first way you can take some of your profits and take it off the table, and you can obviously pay yourself more. Now you're gonna speak to an accountant to know what this means in terms of taxes, your personal income tax, what rate is it versus your business tax. For many countries, it's almost identical. For others, it's not another way you can take some money off the table as a safety net. So you have something, you know, in your bank account in your little nest egg while you're growing, the business is actually getting an investor involved. I know that Basecamp, Jason Fried and David Hanemire Hansen, they did this. They actually got an investment from Jeff Bezos, the founder of Amazon. And it's a very small investment, and he owns a very small portion of Basecamp. Very, very small, but it allowed to take some money off the table. They actually took the investment and they used it as kind of selling some of their shares. So I'm gonna give you a hypothetical. I don't know the details of their deal, but say, for example, you have ownership over the whole business 100%. You get some investors, and you say, hey, I want to give you 5% of my business for $200,000. And you're literally giving them 5% of your business from your own shares. And you're taking that $200,000 and you're putting it right into your bank account, because you're basically selling off a part of your business or part of the ownership of the business. Now, they're not having any kind of majority control or anything like that, but allows, again, to take some of the equity of your business off the table. Very similar to, like, you know, refinancing a house. And what this does is it allows you to have some sort of payback for all the hard work you've done over the years and gives you some sort of safety net, because, hey, you've been living, you know, very, very dangerously, really, for the last few years, and it gives you a chance to say, hey, you know what? I have something to show for all that hard work. There's a third option I want to talk about a little bit. We talked about raising your own salary, but sometimes we make, say, for example, a leap in our income in the business, the revenue we're making from the business, and we're like, hey, let's make another hire. Let's hire another, you know, a senior person. That's going to cost me $100,000 a year. You might have a team of 10 people already, okay? And you're including yourself. That hire may allow you to grow, because this hire is going to do something in your business that's going to potentially allow you to grow your business. But you have options. You have options like taking that hundred grand and investing it in your actual employees, including yourself. You can get, like, let's say, 10,000 if you're splitting it 10 ways. And obviously, raises could be dependent on the current salary. Some people are going to get more than others, depending on where they are in the company. But the point here is that you're reinvesting in your team. If you don't have an increment strategy in your employees yet, if they don't have some sort of evaluation or way to get an increment, that's something you need to consider. But this is a good way to kind of say, hey guys, I want to reinvest in everybody on the team. I want to give you guys an incentive to keep working hard and be a part of the team. And that boost alone can produce a lot of productivity and the benefit of that may be higher than one new hire.

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To wrap up today's lesson, I want to throw in another piece of advice. Sometimes we think the only thing we can really invest in when we put our money back in our business is new hires or new equipment or parties or trips or things like that. But you actually can take some of that money and invest into savings. You actually can put some money up to save some money long term, especially for services, whether it's web hosting, whether it's apps or subscriptions you're a part of. You can upgrade all your subscriptions to the most cost effective plan. Meaning like you can go annual or even two year contracts and save maybe up to 40, 50% on all those bills. When you have that kind of extra cash from profit, you can really invest in savings. If you have a physical office, many people can negotiate a better rate if they pay the landlord up front. They can actually have a contract where they say hey, we have a two year lease, we're going to pay you two years in advance, but we're going to get a discount. You can also stipulate that when you renew they can't increase the price by a certain percentage. You can all do that and you obviously have to speak to a lawyer to get that all done. But but it's a good investment because you're going to save money long run. This can also apply to equipment. A lot of people finance their equipment or finance their computers instead of just buying them outright, which can save them lots of money and interest. So These are some ideas I also want to just kind of give you permission to think about. Hey, what do you want to do with the money that you made with your business? You've sacrificed so much to start this business. You sacrificed years of your life. If you've been doing this for some time, when will you start to pay yourself back? When will you start paying the investment you actually put in that money back? You know, a lot of us had to put our in our own money to get this business going. Have you paid yourself back yet? I mean, that should be step number one, you know, paying back the director loan. Start exploring the answers to these questions at least so that when, so when you're in the position to do something with those profits, you know what to do with the cash. Thank you so much for listening to the Hundred Dollar MBA show. Don't forget to hit subscribe if you love this show. By hitting subscribe you get our next episod automatically. Also, by hitting subscribe you get access to our archive episodes. Every single episode. We have in our archives over 1500 business lessons. And it's the only way to get access to our lessons. So go ahead and hit subscribe. It's absolutely free and you can do it on any podcast app, whether it's Spotify, Stitcher Radio, Apple Podcasts, Himalaya, we're on them all. Before I go, I want to leave you with this. Sometimes as entrepreneurs, we're so busy, we're so invested in our business, we think this business is going to last forever. And often that's not the case. Often you may need to decide to sell. Sometime you may need to decide to let go of the business. The market may start to decline, so you need to think about things financially sometimes and your own personal protection, making sure that you can continue to work and continue to feed this business. But if you don't feed yourself, it's going to be really hard. Thank you so much for listening and I'll check in tomorrow's episode Freeride Friday. I'll see you then. Take care. Hey, Fidelity. How can I remember to invest every month?

With the Fidelity app, you can choose a schedule and set up recurring investments in stocks and ETFs.

Huh, that sounds easier than I thought.

You got this?

Yeah, I do now. Where did I put my keys?

You will find them where you left them.

Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC Member nyse, SIPC.