Taylah Wallace – Friday, November 18, 2016
The best business people have a clear understanding about the concept of growing wealth. Whilst growing wealth may not be the purpose or mission of a business it should be an outcome of a well run business.
Growing wealth in the small business context is about maximising after tax cash which is available for reinvestment in the chosen vehicle of the owner. Of course, the key issue is to have "after tax cash" for reinvestment. This issue is problematic for many in its own right and is covered in a separate post. So assuming cash is available some of the more common vehicles for reinvestment include:
1. Superannuation (either self managed or externally managed);
2. The business entity itself (for continued growth);
3. Other forms of investment external to the business entity such as property or shares.
As with many things in life a balance between these (and possibly others) usually brings the best result. However, it’s quite surprising how many small business people cannot or do not find it possible to strike a balance.
Where cash is available the most common area of imbalance is reinvestment into the business entity. That is, there is over investment back into the business into assets such as stock or plant and equipment. There is no argument that these assets require investment particularly in a growing business. Nevertheless for too many small businesses the soft option for any spare cash is to purchase that new item of equipment or to spend up on discounted stock. Both of these can be good investments BUT equipment or fixed assets must provide a return (i.e. it must be productive and earn additional income to justify the investment) and stock, no matter how heavily discounted by the supplier, must be sold at an acceptable profit margin.
We’ve seen too many cases where stock purchased at good discounts or investments in fixed assets such as equipment are bad investments because they do not provide a level of return (i.e. extra profit) that is acceptable for the investment made.
We are all familiar with the concept of not having "all your eggs in one basket". This needs to be applied to small businesses also. A well run small business should be a "cash machine" that, apart from providing income to the hard working owner(s), also provides additional cash to be put in a separate basket for additional wealth creation for the future.