What should I do with my profits?

23rd January, 2015

So your business has being doing well and you have a decent, consistent profit at last. Then you look at the options of taking more salary or a dividend, and you see the tax man wants his share. Even if you leave the profits in the business, the ATO will still want a share of the pie.

I see so many clients who react to this situation by wasting funds — either by taking too much out of the business and being taxed heavily, or reinvesting it within the business in areas that add no value. How many people upgrade the office and do revised shop fit-outs on their vehicles and IT just because it is tax deductible, when it was not really needed?

Once I have enough to cover my basic needs and those of my family, I focus on where money can do the best for us in the long run. Here are my top ideas:

1. Long-term business planning – increase skills and free up time from mundane tasks

Look for strategies that will add the most value to your business and also your lifestyle. Invest in yourself or a family or staff member. Look at a training course in small business management or skills training, or take on a business coach, as each of these will help you step up to the next level. If you have a family or staff member who could learn to do the business bookkeeping, get them on a software-training course. If you want them to assume a management role over the coming years, prepare them now and it will pay huge dividends.

I see too many business owners looking to pass control to the next generation but not preparing them for the task. The shortcomings in skills only become apparent when the reins have been let go, and that can be too late.

The more you can prepare your business for the next growth spurt, the more time you can spend managing that growth opportunity to its full potential. But that takes skills and the ability to delegate, as well as the talent in your team to handle that work, so invest in training. It may also mean outsourcing some jobs if it is mundane repetitive work that adds no additional value to the business.

2. Add more balance to your life

The other side of the coin is using extra funds to free up time to spend with your family or on your hobbies so you gain a balance between your work and lifestyle. Can you outsource your bookkeeping and free up those weekends of filing invoices and receipts to spend at your kids footy or taking your family away for the weekend?

3. Build wealth

I put some into superannuation and it is taxed only at 15 percent, so once I am over the $18,200 I know that I can save on tax straight away. But while I am happy to save for retirement, I want that money working for my business as well. I have a 5-year plan to use my superannuation to buy my next business premises. I want the certainty of tenure of owning the premises and also to be able to earn a decent commercial rate of interest in my superannuation to complement my other investments.

You have probably worked your guts out to get to where you are now, so don’t waste the profits or focus only on the tax deductions. Rather, concentrate on where you can add the most value to your business and personal life. As with a business, prepare for the future and keep balance in your life, and you can take on any opportunity with confidence.