Before splurging on a new jet ski, it’s important for business owners to balance reward spending with investing for the future.
For many businesses, the economic uncertainty and changes over the past couple of years have been difficult, resulting in a decline in profitability and available cash.
On the other hand, some fortunate sectors have been able to capitalise on the available opportunities and have seen a steady or improved cash at bank balance.
One of the fortunate sectors is the residential property market. Many real estate agents, particularly in South East Queensland, are currently benefiting from a significant rebound in residential housing listings and sales post lockdown.
So if you are in the fortunate position of looking to invest the hard-earned cash savings of your business, where should you look? Broadly, I believe there are three ways to spend these cash profits; on the business owner, on the creditors or on the business itself.
Many business owners impulsively feel it’s time to treat themselves by way of dividends or drawings, particularly after working so hard during a period of difficult economic times.
But before splurging on a new jet ski, it’s important to balance reward spending with investing for the future. Spending the cash profits on creditors by paying down liabilities and debt, may make the business more attractive for future lending or investing possibilities.
Alternatively, reinvesting the cash profits within the business, for instance for working capital, new asset purchases or additional resources, may help set the business up for further success and growth potential.
Where profits are taken by the owner, the way in which the funds are withdrawn and how these funds should be used should be carefully considered. There will be different tax outcomes depending on how the cash is taken from the business. This will have an impact on the amount of after-tax cash available for use or investment by the owner.
The right mix of these three spending options requires careful consideration of both the needs of the business and the needs of the owner in order to maximise the future returns from these profits. Be sure to appreciate the good fortune of having funds to invest, and please carefully consider how your business can best maximise the use of these profits for your future.
Kerri-Ann Smee is a partner at BDO in Brisbane.