MBA2015 Q&A Wednesday: Should I take a dividend in my business?

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Visit Dell.com deals. Hey oh welcome to the $100 me a show powering your business improvement 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 my co founder back in 2014 and today's episode is Q and A Wednesday. On Q and A Wednesdays we answ a question from one of you, one of our listeners. If you got a question you want to ask just email me over@omar100mba.net Today's question is from Wanda and Wanda asks. Hey Omar, I've been running my online business for about two years now and it's going pretty well. I pay myself a very modest salary but up to this point I have not taken a dividend. I would put any profits straight back into the business. Now as an entrepreneur who had a business that crashed and burned after nine years and I didn't take a dividend, I'm wondering if I should this time around. What are the risks involved? I've never done it and I'm worried that if I start to do this, my business will plateau. We love your thoughts. Thanks Wanda. What a fantastic question by Wanda. This is something that is actually a pretty good problem to have. If you're taking a dividend, that means your business is profitable. Congrats, Wanda, for being in this position despite you had some challenges in the past, but obviously learned from it and now you've bounced back with this great business. Well done. In today's episode, I'm going to answer Wanda's question if she in particular should take a dividend and how she can go about it. Also, if you're listening and you're wondering, when should you start taking a dividend, start taking some of your profits and basically moving it from the business to your own personal asset. When is an appropriate time? How much? All that kind of stuff we'll get into in today's episode. Let's get into it. Let's get down to business.

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I want to start today's episode with, of course, a disclaimer. I'm not a financial expert. You should speak to your accountant. You should speak to your financial advisor or lawyer about how to mitigate these risks and manage your finances. I'm only going to share what I know from my own experience. But of course you need to check with a specialized professional for your own case. Now, you might be wondering, what's this dividend business? When should I take a dividend or take money from the business? Meaning that the business made a profit one month. Say, for example, you made $10,000 in revenue and your costs were only 5,000. Your business made $5,000. What do you do with that profit? Do you put it back into the business? Do you take that $5,000 and pay yourself as the owner? This is outside your salary, of course, and see it as like a profit for you as the business owner. Or do you do something in between? Split the difference. The reason why I start the episode with speak to a professional is because the tax laws will differ from one country to another for your business, for the nature of your situation. For a lot of countries, there are benefits in terms of taxes on businesses. So say, for example, you don't take a dividend and you make $60,000 in profit. the end of the year, you're going to pay tax on that profit, but the rate is going to be pretty substantially less. In many cases, not all cases, you're going to have to check for yourself Then if you had to pay, you know, your capital gains tax, this is the tax you pay on money you make outside of a salary, like investments, like a business. So many people, they would prefer to put money back into the business, even if it means growing even more and paying more in taxes because you're making more in profit. But that's not the whole picture. There are other risks involved. What does this mean? Well, if you never take money off the table, if you never take a dividend and everything goes back into the business, you're putting all your eggs in one basket. That means, let's say you have three strong years, and each year you make $100,000 in profit. That means at the end of the three years, you have like $300,000 in the bank for your business and you pay taxes on this and all that kind of stuff all done, right? But now you have a down year, and because you have all this profit, you're spending more. Your budgeting is kind of out of skew and not ready to handle this down year. And you might lose, let's say, $350,000 in that year because of the down year. And yep, you'll operate at a loss. But essentially, you run the risk of never being able to reap the benefits of that actual profit you did in the first three years. If we take another scenario, let's say you took 50% of your profits and took them as a dividend, your budgeting is going to be a little bit different because you don't have that much capital in your Runway or in your bank to use as your burn rate. Right? So it's a little bit of a game of understanding risk versus reward, understanding.

What kind of risks are you putting.

Into your business and your own personal asset allocation, your own assets in terms of how much money do you retain from the business personally and mitigating that risk with, if you do have a down year and don't have a year that is as profitable as the other one, it will eat into that profit and you'll have to be able to absorb that loss. It sounds like with Wanda's case where she actually experienced the opposite. Not having a dividend, putting everything into the business, and then unfortunately had to close down. She was a little bit shell shocked. She's like, I would love to be able to take a dividend just in case something happens and I'm not rocking and rolling all the time. My take if I was in Wanda's place is I wouldn't do an all or nothing thing. I would Take some dividend and then reinvest. And then I would experiment this for three to six months. One, to see if my business growth staggers because I'm not reinvesting that much more money or the total amount of money. Two, I see this as an experiment, and I'm not really taking that much money out of the business and paying that much tax on it. And it also gives me some relief that I'm taking some money off the table and that if things don't do well or things aren't as profitable in the future, I still have a way for me to be able to say, hey, I put some money aside and I have something to show for the investment. Because a lot of business owners put in a lot of money, their own capital, their own personal money, to start the business, and they never actually see that money back. So maybe even just do this experiment to see your money back and monitor from there. So I'm a big believer of experimentation. You should not just do everything at one shot. And you could do this in increments. So say, for example, you pay a 20% dividend to yourself and 80% goes back into the business, and then you try 30 the next month and 40 again. Speak to a financial expert, speak to your accountant. But the point here is that you are experimenting and seeing the effects of these actions. Now, when it comes to growth and reinvestment and the effects of that reinvestment, it doesn't actually usually pan out immediately.

Right?

You're going to need some time to see those effects. So that's why I say three to six months. So keep that in mind as well.

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To wrap up today's lesson, great question by Wanda. I want to talk about something that maybe is not talked about a lot when it comes to this topic. Business is an emotional game in a lot of ways, because we are betting on ourselves, we're betting on our idea, we're betting on Our team, and we are hoping that that bet pays off. And I'm just speaking from personal experience. You need to make sure that it's worth your while personally. When you do cash out on that bet, meaning if your bet does pay out, meaning that your business does become successful, does become profitable, you should really reward yourself in some way. That could be an increase in salary, that could be a dividend. But the point here is that if you never do that, you will be resentful to the business. And I'm sure Wanda knows exactly what I'm talking about. You will feel like, man, I gave my blood, sweat and tears to this business and I didn't get anything out of it. Paying yourself a dividend, paying yourself some sort of increase in salary will mitigate that a little bit and keep you going. And know that, hey, if I push myself and I bet on myself and try to grow this business and it does grow, and I do get a benefit, you need to make sure that impacts you personally as the business owner as well. Because we are programmed as human beings to understand reward, to understand, hey, you work hard, you get a reward for it. And if you never get a reward, I should today for your hard work, then you're going to ask yourself, what is this all for? At some point, that's not a good state to be in. Thanks so much for listening to the 100 MBA Show. If you've got a question you want to ask, just like Wanda did, just email me over@omar mba.net so I can answer it right here on Q and A Wednesday. If you have not already, hit subscribe or follow on your favorite podcast app so you get our next episodes automatically. Also, by hitting subscribe, you are doing your part to show us some love. It feeds the algorithm and lets other people find out about our podcast. Before I go, I want to leave you with this. Sometimes we build businesses because we're passionate about an idea. We want to make an impact on the world, and all that stuff is important. But you also need to balance that with the idea that a business as an entrepreneur is a means to live the life. You want to live your lifestyle. So you need to make sure that it is rewarding you, that the business is actually giving you what you need. Because at the end of the day, what are you doing this all for? You're doing this so you can be fulfilled, so your family can be fulfilled, so you can have the life and lifestyle you like. Don't lose sight of that in your passion. 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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