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Spending Your Profits Wisely

So you’re making money. Revenue is outpacing expenses, and there are a few more zeroes in your bank account. Your labors are starting to bear fruit, and you’re at the point where all your “needs” are covered, and the door to “wants” is finally open.

This could be a problem.

The challenges of success require no less careful thought than the challenges of adversity. As an independent business person, you want to be prepared to make the right moves when the momentum is carrying you forward. You’ve got to be prepared for success, so that you can not only parlay it into even more success, but so that your business can maintain the identity and character that you envisioned. Most importantly, it’s necessary to define your priorities regarding wealth, work, and overall happiness.

That’s why this post is about “spending” rather than “investing” your profits. Investment is one way to spend your profits, and it’s definitely worth considering. At some point, however, you’ve got to pay yourself. Deciding how to do so in a way that’s consistent with your broader goals is part of the entrepreneur’s challenge, and an important component of maintaining long-term success.

What Are Profits For?

Let’s say, for the simplest example, that you’re a solopreneur with an online product. You’ve sold enough eBooks and courses to more than cover your overhead, and you’re left with a sheer net profit of $8k. What’s the best way to spend it? Do you have to plow it back into your business? Is there a certain ratio of business use to personal use that allows you to enjoy your life while still being a responsible business owner?

That all depends on you, and your own priorities. Naturally, what you pay yourself has to cover basic necessities like rent, food, and Netflix. Beyond that, what you choose to do with your money should be informed by what kind of business you want to run, and what kind of lifestyle you consider enjoyable.

What kind of growth are you ultimately looking for? Did you get into business hoping to build the next Google, or do you simply want the freedom that comes with supporting yourself on your own labor? Do you want to manage a business with multiple employees, or do you enjoy the peace and solitude of solopreneurship? Are you trying to maintain your current lifestyle, or are you preparing for the next plateau?

It’s important to ask yourself these questions as early as possible, rather than waiting to cross that bridge when you come to it. Having some guidelines as to the business and life you want to create will allow you to make decisions about your profits that will help you realize your own unique goals, not just some vague notion of “success.” The more specific your vision for yourself is, the better prepared you’ll be to turn profits into positive results.

Spending vs. Reinvesting

When you’ve got some extra capital on hand, the temptation to spend it is strong. Some people will want to spend it on luxury items like cars, clothes, travel, and fine dining. There is surely nothing wrong with that, if that’s what you want. But knowing you want those things is different from assuming you want them, and balancing those desires with your business goals is something that requires careful forethought.

The key is to decide on a ratio of personal spending to business reinvestment. What that ratio is will depend on how large you want your life to be, and how large you want your business to be. If you have that $8k in the bank, and all of your necessary expenses are met, try splitting the profits between your business and yourself. If $4k worth of equipment or training could elevate your business to the next level (and you want your business to be on that next level), then there’s nothing wrong with spending the other $4k on a much-needed vacation. If, however, you’re doing roughly the amount of business you want to be doing, and you’re financially secure, then spending all $8k on something personal may be a perfectly legitimate reward for yourself.

Types of Reinvestment

If you choose to devote some or all of your profits to reinvestment, make it skillfully targeted reinvestment. This breaks down into two categories: growing sales, and growing the business itself. These are related, but distinct categories.

For example, new equipment, a website overhaul, training, or hiring is an investment in the business. Investing this way doesn’t directly promote sales, it simply enhances the size, capacity, or capability of your company. This can be a precursor to more sales, but not necessarily. It could simply result in improved product quality or a diversification of your product line.

Directly boosting sales calls for a different kind of investment, generally a marketing one. Advertisements, email offers, promotional discounts (the decreased revenue from the lowered price being the cost of the promotion), and other forms of direct outreach are sales boosters. They may bring in loads of new customers, which you’ll then need the capacity to serve in the long term. This means more success, more profit, and more work- it that’s what you want.

Which form of reinvestment you choose depends on your own business plan. Do you want a big, sprawling business that serves as many people as possible? Would you rather have a niche business with a small, loyal following that prioritizes a more personalized approach? Neither answer is “correct;” it’s your business. But knowing which you prefer is crucial in deciding where to funnel your profits.

The Lifestyle Question

I’m fortunate enough to have had a few great mentors and guides in the world of online entrepreneurship. Michael Port taught me how to communicate. Noah Kagan taught me how to develop software. Another major influence in my approach to business has been Thrive’s Gary Vaynerchuk.

Vaynerchuk has made millions as a creative business thinker and entrepreneur, but his approach to personal spending is what had the most impact on me. He specifically avoids conspicuous consumption, eschewing flashy cars and other obvious signs of wealth. That’s not to say that conspicuous consumption is somehow wrong- it’s to say that a pre-determined notion of what lifestyle makes you happiest is a better goal than simply wanting “more.”

“More” is a vague and limitless goal, which is to say it’s not a goal at all. If the cost of a Porsche could buy your business the capacity it needs to sustain a modest, but stable revenue stream for the foreseeable future, a person with modest, but stable goals would do better driving a perfectly good Honda. If the cost of a Honda could allow you to see the French countryside, then someone with a travel bug would do better booking a plane ticket.

A lot has been written about how to grow your business and make as much money as possible. What you do when those efforts start to produce results, however, is something entrepreneurs might need to spend some more time considering. Start by defining what matters most to you, and as your business grows, balance the need to profit with the need to reward yourself for doing so. Rather than an open-ended quest for revenue in general, remember why you went into business for yourself in the first place- to build the life of your choosing.