When is the right time to start spending the profit you make from a new firm?
NEVERRR. Muahahaha.
No, seriously though. On a personal level. Never.
Unless your entire intention with your firm is to create a lifestyle business, and nothing more – you’ll need to be reinvesting your profits in order to grow, or create new revenue streams.
Sure, you can pay yourself a reasonable, healthy wage if you can afford to – one that provides enough income to enjoy life and a few little luxuries (if you’re lucky), but when it comes to the money left over after that – you need to reinvest it if you are going to build anything sizeable and/or meaningful.
First of all, I’m making the assumption that you’re already running a profitable firm (if you aren’t already doing so, you’ll need to focus your attention on actually making the profit, first and foremost, since this is quite a difficult thing to achieve in the first instance).
I’m also making the assumption that the profit you are making is what they term ‘corporate profit’ – in other words, a profit after you have paid yourself a healthy, reasonable wage, and all expenses.
This is different to the profitability level coined ‘ramen profitable’ – where a business is technically, marginally profitable, but the owner(s) are having to live off noodles in order to keep it that way.
That’s no way to live, and shouldn’t be in anyone’s long-term business plans.
So, if all the above is correct and accurate, you’re in a position to start thinking what you should do with your firm’s profits.
If not, you need more time and energy spent on making your business profitable – to the point of corporate profit – before you start planning what to do with these anticipated funds. You’ll need to understand your break-even point ie how many sales do you need to achieve to cover all cost-of-sales and overheads (including a reasonable wage for your own living expenses and lifestyle) – and figure out what it will take, in terms of monthly revenue, to reach this point, and work towards achieving break-even, first.
Reverting back to your initial question, what is the right time to start spending the profit you make from a new firm?, a break-even analysis will at least provide you with an understanding of when you’ll be in a position to think about what you do with your new firm’s profit.
Typically, companies can start turning a profit anywhere between 6 months to 3 years or more.
It really is dependant on the industry and business model. Those businesses that can start with an MVP (Minimum Viable Product) that requires very little, or even no, overhead, will be more likely to see a positive return quicker.
But when it comes to what you do with the profit it generates – if you want to build something significant and/or protect the future of your company, you’ll need to reinvest, diversify, and experiment with new concepts and ideas.
It’s down to personal preference, of course, and the ultimate nature of the business. If all you are intending to achieve from your business is to maximise your personal short-term financial gains, then you milk it for what it’s worth, and dispose of the company when it burns out or reaches the end of its life.
My personal preference has always been to reinvest, and to spawn new ventures using the profit my businesses generate – since this is what I enjoy, and I want to create ventures that can adapt to market changes and last a long time.
Whatever your intention is with your own business, good luck!