Business is struggling during these hard financial times. Entrepreneurs and business owners face a hard dilemma: reinvest in the business or cash out? Here is how to determine the better option. First, a little story about an American entrepreneur to illustrate.
Spencer was regarded and treated by his wealthy family as a black sheep, a playboy, who would not amount to anything. This thinking was even compounded when Spencer chose to settle in the West than in the East coast where his wealthy and politically affiliated family resided. Spencer came to Colorado Springs in 1891 fresh out of Harvard and started to strike on his own. He wasn’t there for long when his brother, Boies, a Philadelphia politician, received a request from him to send $1500 to go into a mining deal. Boies was exasperated with his brother and, instead, sent him $150 for train fare back to home.
Many years later, Spencer returned to Philadelphia and paid Boies a visit. When the brothers met, Spencer gave Boies gold coins amounting to $75,000. Boies was surprised and told Spencer that he did not go into the mining deal and just sent him $150 for train fare. Spencer replied, “That is why I’m giving you only $75,000. If you wired me the amount I was asking you, I would be handing you three quarters of a million now.”
If some enterprising people took out an instant payday loan to start a home based or an online business, it really means that they are serious to earn extra income through the venture and not just from their regular salaries. But when should they start thinking of cashing out from the business? Do they ask for dividends immediately after the first year of the company? Or do they delay personal gratification until the business is stable by reinvesting the profits back? If the entrepreneurs and business owners who would often get cash from the business for personal needs (paying credit cards, mortgages, and such) instead of applying for payday loans, this sheds a negative light on the business or company. This kind of scenario would not only limit the growth of the company or business but likely increase the risk of its going bankrupt.
Companies that are not yet stable in generating continuous cash flows may indeed face a greater risk of bankruptcy. People should determine if they are financing their personal expenses from the profits of the business or from the capital itself. When this happens, the business would go down. It is important then to separate the finances of the company from personal finances. To keep things separate, business owners can take cash from the company by paying themselves a salary.
On the other hand, when these entrepreneurs reinvest their profits in the business, they should keep in mind that they are investing in the future growth of the company. Businesses with higher cash reserves have more options for growth, such as expansion, acquisition of equipment, or even buying out competitors. Reinvesting business profits requires the entrepreneur to exercise a certain level of personal discipline.
Author Resource:
Sean Teahan co-founder of http://www.cashdoctors.com.au preferred short term lender, shares his insights on money matters. Founded in 2005 Cash Doctors has helped thousands of Australians with their fast cash loans but that’s just the short term solution.
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