Thursday, June 6, 2013
Revenue before expenses
So many people who run businesses I know focus on expenses before revenue. I think that is totally the wrong way of looking at things. Let me give you some reasons why.
Many say they they want to minimize their tax. Great, that should be part of your strategy but it shouldn’t be your major strategy. For example, many business owners elect to keep the money in their business and only draw out the minimum they require as they require. That minimizes their taxable income sure but it comes at a penalty.
By minimizing your personal revenue that way when it comes to taking out a loan for a house, a car or anything the bank is going to look at the minimal income produced and possibly reject the application even though there maybe ‘oodles’ of money in the business.
Hopefully, at some stage you are going to want to draw that wealth out of the company and guess what? It is going to get taxed then. Chances are it will probably be taxed at a high rate. This typically happens when you need the money for an emergency.
To me paying yourself only a minimal income is focusing on expenses rather than driving you to expand the revenue the business generates. The old adage in budgeting is that you should ‘pay yourself first’ and then work out how to manage the rest. For me, it is the same in business. You should always pay yourself a decent rate, pay the tax (because you’ll probably have to pay it anyway at some stage) and focus on growing revenues which is more likely to help your business succeed.
Minimizing expenses is a defensive business strategy that makes you more vulnerable the longer you pursue it because it doesn’t promote growth and tires you out. Also, as any fighter will tell you, you can’t defend forever, sooner or later you get hit. Alternatively, if you focus on revenues before expenses you are improving the strength of your business and making it more resilient. You are also enjoying the fruits of your labour instead of deferring it until some unknown date in the future.
The bottom line is that you should be out there looking for business income rather than staying glued to a screen wondering how to save money. Again, revenue before expenses.