Q: How much of my company’s profits should I reinvest and how much should I pay myself?
Enzo Vinholi, founder Like It Was Yesterday
A: The answer depends upon two things. What stage of your business is it in and what are your personal goals?
If your firm is in its early stages when there is high growth and/or little to no positive cash flow, the priority needs to be reinvestment.
If your company is growing at 20 percent, it probably does not make sense to pull cash out to put in the bank at 1 percent. In that case try to reinvest 100 percent, if at all possible.
On the other hand, if your firm is mature and has less growth it might make sense to start taking cash out.
One way to do this is to simply pay yourself a higher salary.
The alternative would be to have the firm make distributions to the owners directly out of the profits, such as by dividends.
In the rare case where the firm is very, very mature, has zero buyers, and you have no heirs to take it over, and you are personally are too old, or ill, or simply want to retire, then taking the maximum out in salaries and dividends might be the only exit strategy.
The second issue of determining how much to take out of the business vs. reinvesting depends on your personal life goals.
If it is long-term wealth creation, reinvest.
But usually all business creators wish to monetize their business eventually. So if you need the current income just to pay your bills, then you need to draw a salary or in some way take cash out of the business.
If you have sufficient income to live on and you simply are at a stage of your life where you wish to have your personal net worth to be more diversified, then you should consider selling all or part of your business.
But if your personal life goal includes a desire to start diversifying your net worth but at the same time you still enjoy running the company, then take more cash out of the business.
You can do this as salaries and dividends and then invest that money in stocks or bonds to diversify.
David Vang is on faculty at the University of St. Thomas Opus College of Business.