MBA1825 Q&A Wednesday: Should I take a dividend or always reinvest in my business?

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Hey oh. Welcome to the $100 MBA Show. Pump up the volume for better business knowledge every single day with our 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 Webinar Ninja, an independent software company I started with my co founder back in 2014. I and today's episode is Q and A Wednesday. On Q and A Wednesdays I answer a question from one of you, one of our listeners. If you have a question you want to ask, just email me over@omarrmba.net Today's question is from Roland and Roland asks, hey Omar, I love the podcast. Would love to get your advice on something. I run a small software business with a very small team but we're profitable and have been profitable for some time. My question is should I take money off the table and take a dividend from my profits or should I always reinvest in my business? Our business is self funded and I'm the only owner and if you can't tell, I'm pretty risk averse. Would love any advice. Thanks Roland. Solid question Roland. Should you take a dividend from your profits in your business or should you reinvest in the business and fund your growth, take your business to another level? This is a really practical question because if you're doing things right, it's a question. It's a situation you're gonna have to deal with at some point and my opinion on this might surprise you. I'm gonna give Roland my advice, but also I'm gonna set up some criteria for you to make your decision when it comes to this topic. Some questions you should ask yourself that will lead you to your own answer. So let's get into it. Let's get down to business.

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So Roland is a self funded company. He's the only owner and he's profitable. So congrats to that. That's a no little thing. Being profitable is the name of the game and he's been profitable for some time. And he's asking the question, should he take these profits 100% of them and reinvest them right back into the business to invest in growth? So I want to start with a question, and this question is for Ol and it's for you too, to think about and to answer. Do you really want to grow? I know this sounds like a strange question, but do you actually want to have a bigger and bigger and bigger business? Do you want more employees? Do you want more clients and customers? Do you want to have to manage more money? Do you want to manage more costs? This is a real question because you have the option to stay small. If you're interested in this topic, there's a great book by Paul Jarvis called Company of One that delves into this concept. Maybe staying small small is a good idea. There are benefits to staying small as well as drawbacks, of course, but this is a real question. Some people just think you have to always grow. You always have to be big and be as big as possible. No, you have the choice as a business owner. Just like somebody who decides to open a pizzeria in their local town, they can open a second or third branch or franchise or grow into a national or international brand. Or they can just stick with one store, one location. So you have the choice. If you're interested in growing to hundreds of employees and thousands upon thousands of customers, if that's not something that you envision for your company, you want to have a small, quiet business, then the way you reinvest or use your dividends will be different from one that does have that goal. So that's the first thing we have to establish. The next thing we have to ask is, did you invest any of your own capital in this business? And most businesses that are self funded, the owner of the business put in their own savings at some point or at some points, you know, throughout the growth of the business till they got to the point where they're profitable. This could be a significant amount of money. It could be like $500,000. My advice, get a good accountant. I'm not an accountant. This is not financial advice. I'm just going to give you what I, you should consider and you should take this conversation to your accountant. But normally, from what I understand is if you're putting in money into the business, that's kind of seen as a loan from the business owner because the business is its own entity. And if you have dividends that should be paid back to whoever gave that money, which is you. So that should be your first consideration. And I really believe this, especially if you are a self funded company because you need to recoup that initial loss that you made because then you're really truly profitable. Because that means now your initial investment has been paid back with the dividends and everything now is gravy. Next, it doesn't have to be one or the other. If you are a risk averse and you want to keep things small, but you do want to have some extra cash in the business to maybe expand one department or invest in marketing or maybe get somebody to help you do all those admin tasks you hate. It's okay for you to take, let's say 60% of your profits and reinvest it 40% as a dividend. Now like I mentioned, if you're risk averse, a lot of people that are risk averse like this concept because it kind of saves for a rainy day. That dividend that you're pulling out of the, the, the company's profits, it's kind of like taking money off the table, saying, hey, we're doing well now and I do believe in the company and I believe in reinvesting, but let's take some cash, put it aside as a dividend because I might have to use it later on or I need it for my own personal life. I need it to make running this business worth it, whether it's buying a house or a new car or taking a vacation, for crying out loud. Right? So taking money off the table is not a bad idea, especially if it's a portion of the profits now, if you're not like Roland and you do have other owners, you have investors, you have other stakeholders involved, this is obviously a larger discussion with other people. Also, in most cases, when you have investors, growth is your number one goal, your number one target. So reinvesting any profits is usually the kind of status quo to create a flywheel and keep on growing so again that the investors can get their investments back. Right? So depending on your business model, your flexibility on this decision might change. Now, Roland has the ultimate level of flexibility because he's self funded and he answers only to himself because there's no other stakeholders. Now, if you do want to invest in your business, you want to reinvest your profits in your business, my advice to you is take a look at low hanging fruit. What is the best way for you to get a return? What are some things that you can put money in and see a return in the near future? There are three areas in your business that in my experience are kind of a surefire way to make your investment give you a return on investment. Number one is your product improving on your product. That could be hiring a developer, it could be hiring a product manager. This could be maybe investing in better suppliers or better product that you're selling in your e commerce store. The point here is that you're offering a better product to your customers in some way. Number two is the experience. And that means reinvesting in customer experience, in customer success and making sure the experience of purchasing from you is exceptional. This could also mean a better website, a faster website. These are investments that will get you a return because it directly impacts the experience of the customer. And lastly, marketing that has been proven to bring in a return on investment. Marketing is a great way for you to just kind of turn on the valve of revenue. But you have to know what works with marketing. You can't just throw marketing dollars like you know, just spend a bunch of money on billboards or Google Ads that don't work. You need to have taken the time with a little bit of money to see which marketing channels work for your business, what messaging, what funnels work. So when you put in, let's say a hundred dollars on ads, you get 2 or $300 worth of revenue. Once you've kind of dialed that in, it's all just a numbers game. Put more money in, you're going to get more money out. So product experience and marketing 3 high return on an investment areas in your business that you can invest in. USAA knows dynamic duos can save the day like Superheroes and sidekicks or auto and home insurance. With usaa, you can bundle your auto and home and save up to 10%. Tap the banner to learn more and get a'@usaa.com bundle restrictions apply. To wrap up today's Q and A Wednesday's question from Roland. This is your business, Roland. You could do what you want. You can take a hundred percent of your profits as a dividend. Again, I would speak to an accountant because they'll tell you what that means in terms of taxes and what is going to save you money and all that kind of stuff. It all depends on where you live and the law is there. But the point here is it's up to you, okay? And it's all up to the way you want to grow your business. At what pace have you actually made an initial investment and you need to recoup that investment. And it's actually okay for you to say, you know what, I struggled for years to get to my business to that point where we're profitable consistently. I just want to take a dividend, 100% of the profits. I want to just take a dividend for a year and then I'll reinvest. It's okay. But I do recommend that you do take a portion, even if it's a small portion, 20% and reinvest in the business and or keep it as a profit in the ledger because you never know what's going to happen in the future in business. Your market might shake things up. You might have a down month. You want to make sure that you're able to cover your costs and not have any stress. Advertising costs might skyrocket, your suppliers might up their prices. The rent for your office might get more expensive. You never know. The point is, is that 20% every month, keep it in the business, will help you weather any storms. Again, I want to remind you guys, and this is just not some sort of disclaimer, this is also just my personal advice. Get a good accountant, even if it's just part time, even if you just consult with them in a few hours to sort out these questions, they're going to know what's best for you, your country, your state, where you're from, your business, all that kind of stuff. And they'll be able to kind of put it all together in a spreadsheet so you can see it in black and white. If you don't know where to find an account, one of the easiest ways to find one is just to go to a co working space. We work your local coworking meetups. Many of them work there because they know there are other businesses and startups that need accountants. And anytime you join any of those kind of groups, there's a directory. Look for an accountant, have a coffee, see if you're a good fit. Thanks so much for listening to the Hundred Dollar MBA show. If you love it here, hit subscribe right now so you never miss a beat. If you have a question you want to ask, don't forget to email me over at omar@100mba.net so I can answer your question right here on Q and A Wednesday. Before I go, I want to leave you with this. Just in my experience over the last 15 years of being an entrepreneur, when I go to extremes when it comes to this topic, whether it's taking all your profits as a dividend or reinvesting all of it, whenever I do 100% of either, I regret it. It's actually a bad move. I've never found myself, you know, happy with that decision. Even if it's an 8020 split, it hedges your bets and allows you to have that flexibility. Thanks so much for listening and I'll check you in tomorrow's episode. I'll see you then. Take care.

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