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Chris LoCurto

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August 19, 2011

What Should You Do With Profits?

August 19, 2011 | By | 14 Comments">14 Comments

Recently, we launched the First Ever EntreLeadership Podcast after receiving many requests for it. The goal was to create an additional way of teaching the EntreLeadership principles. The day we started, it went straight to the No. 1 spot for Business Podcast downloads and was the No. 2 Overall Podcast download.

Now that the podcast has debuted, we want to hear from its listeners. I will answer some of the questions via the podcast, as well as through my blog. One of the first questions we received at podcast@EntreLeadership.com was:

I own a small financial coaching business on the side and average about $2,000 worth of sales each month. I do not have any employees at this time, and I am unsure what to do with the income in regards to profit. Is there a formula I should use to allocate those remaining dollars after operating expenses for things like advertising, retained earnings, paying myself, etc.?

That’s a fantastic question that so many people ask. Here are a few steps you can take:

  • Take it home! – Now, when I say, “Take it home,” consider whether you actually need the money at home. If so, take what’s necessary for a living wage (how much you need to live on). If you don’t need the money, you still probably should take home something small so you emotionally feel like you’re winning. Otherwise, look at all the places inside your business where you can grow.
  • Piggybank it! – You need to be saving money and building up retained earnings that equal 50% of your annual expenses. That number should be whatever it would cost you to keep your doors open for six months if you didn’t obtain any new business. It’s not overhead and the expenses of your current orders. If you don’t have any new work, you don’t have to pay those expenses.
  • Grow it baby! – Where do you need to spend money to grow your business? Most likely marketing, possibly advertising, or, even better, sales people! Can you invest into team members who bring money in the doors? If they’re commissioned sales people, it doesn’t take much from you to get them going.
  • Look out! – Or better yet, look ahead. If you’re good on the previous three options, start looking at a percentage of your income to put into an HR fund. This amount could be for profit-sharing, Christmas parties, special outings, helping team members with needs, etc. Obviously, it’s not needed if you don’t have a staff. But as you grow a team, you should take care of them.

Percentages are really based on your needs at the time, as well as what you’re willing to share. You make the decisions, just always be thinking about your team.

Questions: How have you used profits in your business or what questions do you need answered?

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  • http://www.seomanipulator.com/ Seo Manipulator

    I try to bank and grow my profits by reinvesting.

  • Chris Johnston

    I actually had this brought up over the weekend. Talk about being timely!

    • http://Chrislocurto.com Chris LoCurto

      hahaha…nice!

  • http://gravatar.com/lgthaxton Louise Thaxton

    In the past, I have used profits from my busines in all of the four areas you mention – taking a percentage home, putting some of it aside for slow times, investing for growth of the busines, and giving back to the team.

    One additional area I have focused on – is to choose a charity – usually one focused on wounded warriors – for the year and give a portion of our profits to that charity. One year it was the Fisher House. Another it was Wounded Warriors. This year – the Boot Campaign – and we are purchasing a pair of combat boots for every loan we close.

    Good point on building up your account in the event of downturns in the market – wise advice!

    • http://Chrislocurto.com Chris LoCurto

      It’s a must, and it’s Biblical.

  • http://twitter.com/ibnabeeomar ibn abee omar (@ibnabeeomar)

    timely article .. im working with a company right now thats basically growing out of a volunteer side effort of 3-4ppl and is looking at generating significant revenues now within the next 6-12 months, so we’ve been trying to figure out how to budget accordingly and set our percentages as money comes in.

    with that being the case, how much would you suggest for retained earnings since there aren’t yet any expenses (and salaries are 100% commission)?

    • http://Chrislocurto.com Chris LoCurto

      Dang brother, no expenses?! That’s a pretty sweet deal. I would put together three different plans on growth. We like to say Good, Great, and God sized plans. What are all of the expenses that would go along with each of those growth plans? Do they include buildings, admin staffs, etc.? Also, what can you do marketing wise to grow the business, save for that. I would also look at possible ways to bless the volunteers that don’t include salaries. Salaries will mess up the whole volunteer system. Then I would look at types of HR functions like partial health insurance help, great yearly parties, etc. We have HUGE Christmas and summer parties where we bless our team members. Does all of this make sense?

      • http://twitter.com/ibnabeeomar ibn abee omar (@ibnabeeomar)

        awesome, definitely makes sense, thanks for the feedback!

  • http://www.nuisto.com Chad Gorshing

    I started my own consulting firm once I couldn’t get on with Dave’s web team over a year ago. So far it has turned out great. Being in the computer/software world, there are a lot of user group meetings, conferences, and events throughout the year. I’ve used some of my profits to help these out with sponsorship (it keeps them going and functioning, plus marketing for me).

    There is also a camp here in Oklahoma, OWL (Oklahomans Without Limits) that I send some sponsorship money towards as well. Being I do not yet have 50% expenses in the bank, maybe I should focus more on an emergency fund.

    As some small companies look towards sales or marketing as one of the first hires, I’m actually thinking hard about a personal assistant. My reason for this is my wife is legally blind and cannot drive. I spend a lot of time driving my family around and helping them run errands (shopping for wedding showers, friends parties, groceries, cloths …etc). I’m wondering if it would be beneficial if I had some help with those things.

    • http://Chrislocurto.com Chris LoCurto

      I personally would get the emergency fund up quickly and then go back to giving. ‘Take care of your household first…”

      As for the assistant, it’s a great idea if it allows you to stay more focused on the company and make more money than the assistant costs. If so, rock on. And it doesn’t have to be a full time person. Some people are just looking to pick up a few extra hours.

  • http://www.cabinart.net Jana Botkin

    Congratulations on the popularity of the podcast, Chris! I loved listening to it. Obviously there is a HUGE interest in the subject and in Dave’s business advice.

    • http://Chrislocurto.com Chris LoCurto

      Thanks Jana!

  • http://ericspeir.com/ Eric Speir

    This is some great advice. That’s an interesting figure about building up annual expenses. I wonder how many people actually follow that advice?

    • http://Chrislocurto.com Chris LoCurto

      Unfortunately, not enough. It’s essentially an emergency fund for your business.