How Much Money Should Your Business Be Saving & Investing?

The following is a great question that I recently received regarding investing money and building the net worth of your business. Because I think that this is a very important topic that countless entrepreneurs overlook, let me share with you the following:

“Hello Joel, I have some quick questions I am hoping you can assist me with. My husband and I have been studying your DVD Series for which we can’t express our appreciation more! They are an invaluable tool for educating and helping us all in getting started in the industry….My questions are (1) in saving money and building a portfolio for our business, how much money should we be saving, and (2) what are the tax ramifications of saving this money in our business? Won’t this mean that we are showing a profit and, therefore, make us pay more in taxes? Thank you again, Joel, for all you do and all of your great information.”  – Jennifer Holden

First, thank you very much for your great questions, Jennifer. The obvious reason why I share them on this post is because I know for a fact that others have similar thoughts, questions, and concerns.

Now, as you referenced, I do discuss the importance of saving money in my DVD Series. There are several reasons why you should be saving money as I discuss in my information. But, in looking at the BIG picture, the reason why you want to save money is because it literally builds the net worth of your business. More specifically, should you plan to sell your business in the future for a nice profit you will literally be able to illustrate to prospective buyers that you’re a profitable business. Nothing speaks more loudly and profound than cash money! When you can literally illustrate that your net worth has grown over the life of your business you just became instantly “attractive” to prospective buyers. And yes, you will definitely receive a higher sales price!

So what method do you actually use to save money? There are several. But honestly, I strongly suggest that you work closely with and consult your financial advisor and/or accountant. Sit down and discuss the kind of financial “vehicle” you wish to use to invest money over time. For my business, we started with a simple mutual fund account in my company’s name.  This was a suitable investment vehicle because at that time interest rates were much higher than they are today – we were in a more thriving economy versus the current stagnet economy that we suffer in today.  But in understanding my exit strategy, we were aggressive for the first many years in terms of risk level and then, as I began to prepare for my exit strategy, we began to gradually and purposefully become more conservative to limit potential losses.

The two primary benefits to saving money and building the net worth of your business is that, again, you’re able to illustrate to prospective buyers that your business is profitable. And next, when you actually leave the business, you leave with a nice “pot of gold!”

In terms of how much money you should save, there is no right or wrong answer.  The amount and savings strategy is unique to you and must be tailored to meet your needs. It’s very difficult and uncomfortable to offer you specific number amounts as there is no right or wrong answer. Further, I don’t know the particular dynamics of your business, your local market, and your financial circumstance.

However, what I can tell you is that saving money will most likely be an incremental measure over time. As your business grows and becomes for profitable you should gradually and proportionately increase your amount of savings and investments. Trust me. I know that it is very difficult to save money while you’re working to build your business – especially in the very beginning. But I can’t stress to you enough the need to, once you’re generating positive cash flow, begin saving and investing money on behalf of your business. Start with $100 a week. As your business goes, work to gradually expand and grow to $100 per day and so on and so forth.

Out of convenience, I typically share with NEMT and home care business owners that they should, eventually, be saving no less than $100 per day for two reasons.  First, if you’re business cannot affort to save $100 per day then your business model needs help and improvement!  So if that is the case, you need to re-evaluate and fix your business model to become more efficient and profitable.  And second, if you save $100 per day in your business, then your company’s net worth is increasing by $36,000 per year.  Especially if you are able to increase this amount, over time your net worth can quickly begin to compound.

Again, let me reiterate, this is for your business’ net worth – this savings and investing is in addition to the salaries and draws that you as a business owner take from the business.  This also does not include your own personal savings, investing, and retirement accounts that you should always be working to fund.

So, what are the tax consequences of saving money in your business and building your company’s net worth? Well, again, there is no one single one-size-fits-all answer. There are many variable and components associated with such a question to include your type of legal structure, the amount and value of your assets and much more. In short, yes, if you show a profit you will be obligated to pay some degree of tax. But the good news is that with a growing transportation business you should have asset depreciations costs, possible tax credits, and more that can help negate some of your taxes. Again, this is why it’s critical that you align your business with a good financial adviser and accountant or tax preparer. They can provide you with much more targeted specifics unique to your business.

Now let’s be realistic. Does paying taxes stink? Heck yeah – especially with the new tax laws just passed by Obama! I can assure you that to this day I have never grown accustomed to it! But regardless, it is necessary and goes with the territory. Further, showing profits and paying taxes will actually help keep the IRS off your back. If you keep showing losses after losses it is probably only a matter of time before it raises suspicion with the IRS which can lead to an audit. So is it an inconvenience? Of course – paying taxes is always an inconvenience. But conversely, it can actually help to protect and preserve your business while you’re increasing your net worth.

Again, think about the big picture. If you can save a daily average of ONLY $100, that’s roughly $36,000 per year! Over several years with compounding interest and increasing investment amounts you will literally walk away from your business with a nice “pot of gold” in addition to your sales revenue.  And as I mentioned, if you’re business is at least two years old and you’re not able to save and invest at least $100 per day then your business model IS definitely broken! And if you do fall into this category, then it’s time for a business “overhaul.” You need to study my DVD’s and you NEED to attend one of my live Seminars.

There are many more details to discuss regarding this topic than can be presented in a post. If you haven’t done so already, CLICK HERE to learn more and to invest in my Boot Camp Seminar DVD Series.