Subscribe
Share
Share
Embed
How much of the profits your company generates should be reinvested and how much should be set aside for other investments like real estate?
Service industry business expert Brian Harding draws upon his many years of experience to share insights, strategies, tactics, and ideas to help business owners in service industries (like contractors, home and auto repair services, IT providers, CPAs, and B2B businesses) overcome challenges in their businesses. Brian takes on a wide range of topics small business owners face with growth, delegating, customers, employees, and processes, as well as the internal struggles and fears small business owners must overcome to build the business and lifestyle they dream of.
Brian Harding 0:04
Should I invest profits generated back into the company or invested in real estate?
Narrator 0:11
Running a service business can be hard. It is not unusual for business owners in industries like contracting home repair, auto repair business to business services like janitorial it and accounting, and many others to feel overwhelmed by all the priorities facing them at any given time. Between addressing the needs of the customers, managing the employees, figuring out the financials, and getting processes in place, feeling like you're making significant progress on your business journey can be difficult. Welcome to service industry success Hosted By Brian Harding. Each week, Brian will look at real world strategies for building the business you are dreaming of while also sharing tactics to get through some of the most frustrating parts of business ownership with a lot more ease. Let's get started.
Brian Harding 1:02
So Tony B asked me, Brian, how much of the profit our company generates should be reinvested back into the company? And how much should we be investing in other things like real estate? And Shelley C asks a very similar question. What are the first steps to begin investing in real estate? By the way, you can shoot me your questions by going to my business Facebook page, which is facebook.com/service industry success. And you can just shoot me a DM there and ask whatever questions you have. But back to the questions that Tony and Shelly asked about how much money should be reinvested and how much money should we set aside for things like real estate investing? I have an answer for that there's it's kind of a multifaceted answer. So most business owners, the first foray into real estate investing is going to be buying the building your business resides in or is housed in. So I'm going to focus on just that in this episode. You know, when you get into when you've done that, then you know getting into you know, buying rental houses or apartment complexes or Airbnb type things like once you've done your building, a lot of the the unknown pieces kind of fall in place. And you would need a lot of explanation for some of the things we're gonna talk about. So I'm just going to talk about taking that first step, which for most folks, again, is buying the building that their business is in. So to really develop a strategy for investing in real estate, here's some things I would suggest. First is, like many things that I tell folks, when they ask me, How should I plan for this, one of the first things you got to have a good handle on is understanding what your company is ultimately going to look like. And I'll talk a little bit about that more later. But it's pretty self explanatory what your business gonna look like in 10 years, 20 years, 15 years, when you retire, whatever time frame you put on it, what's it gonna look like how many employees you're gonna have? What's the structure gonna look like? So that's the first thing. The second thing I'd recommend is getting familiar with the book Profit First, if you have not read Profit First, I would definitely recommend reading that that's going to be helpful for this discussion. The third thing is identifying what your personal tax liability is, and developing your personal tax payment strategy. That's a critical piece of this real estate thing, you'll see how in just a couple minutes, and then identifying your need and strategy for creating a rainy day fund that meets your needs. That's the fourth thing. And then the fifth thing is refining your plan with your CPA and banker. So let's start from the top there. The first thing I mentioned was develop an understanding of what your company is ultimately going to look like. So this is probably going to be the hardest part. This is probably the hardest part for one of the harder questions people have to ask themselves about anything having to do with their business. Unfortunately, this is one thing that's difficult, so people kind of tend to avoid it. Someday I'm going to write a book called like the top 10 questions to answer to solve all your business ownership problems. And this would be one of them. It's extremely difficult to have any kind of accurate planning or to develop ideas for how you're going to accomplish this or that. If you can't, at least say in 10 years, 20 years, 15 years, 30 years, whatever my business is gonna look like this. And I literally mean drawing out an organizational chart, I literally mean defining how much revenue, how much profit, how many departments you're gonna have, I literally mean all that. And one of the things that I can help you with, for instance, if you're buying my course or whatever, there's a methodology I can walk you through to do that. So but you may not need that. So the first thing is you got to figure out what your company's gonna look like. And there's a couple of reasons for that. You don't want to buy a building too early or too late in your company's growth. If you have six employees right now, and you're gonna have 50 Someday, you don't want to buy a building in the next couple of years. One, you're going to make a lot more money probably, by adding 20 Of those, you know, 44 more employees, you're going to add over the next few years than you would by buying a building, it would be just a much better ROI and a better return on your money to reinvest more into the business now and get your staffing level up or your you have, you know, 10 or 15, more revenue producing employees bringing in $300,000 a year, and you get, you're gonna keep 10% of that as profit, let's say or 20%, or whatever your numbers are, that's gonna be a lot more profitable than buying a very small building. Second thing is, if you have those six employees, and you're gonna have 50, someday, you're gonna outgrow that building pretty quickly. And which means you're going to be either becoming a landlord in that small building, and then trying to buy in that next size building, and then grow out of that one and become a landlord or that one and go out. And by the next one,
that all sounds awesome that you're developing this real estate empire. Again, though, you're going to be putting a lot of money that you could be reinvesting back in your company in real estate. And at that stage six employees on the way to 50. It just mathematically, I just doesn't make sense. And, you know, while you could say, well, in 20 years, I'd have five buildings that may be true, but what's the cost going to be on the profitability size of your own business, your primary business that is, and what's the distraction level, if you're a property manager, now, for five buildings, that's a, that's a job. So having a handle on what your building is going to, or what your business is gonna look like in 10, or 15, or 20 years, and where you're at relative to that is an important component is, I would recommend not trying to buy your building until you're, you know, maybe 75% of the way to your ultimate goal, maybe 50%, whatever, you want to buy a building that you're not gonna outgrow, and in two years, and most, most of the time, you're gonna underestimate how much you're gonna grow. And you're gonna buy those, and it's already getting too small in some cases. So I would just recommend waiting until it makes mathematical sense to buy the property versus versus putting money back in your company and buying vehicles or buying equipment. And so you can have employees, which are going to bring more money to the table. So that's the first thing to consider. What's coming in, it'll look like where are you at relative to that? And is your money better spent reinvesting in the company in assets for employees? Or is it better to do with the building? Again, for me, I would rather reinvest in the company more earlier, and get as quickly as possible to, you know, 75%, of what my ultimate goal is, and then start looking at the the building stuff. So the next thing is, get familiar with the book Profit First, if you haven't read that book, you just you have to read it ASAP. This is probably the easiest thing on this entire list of five things. But if you haven't read the book, the gist is you're going to pay yourself first. But most business owners do is they pay all their expenses, they pay their rent, their labor, their materials, insurance, whatever. And then whatever's left is quote unquote, profit and Profit First kind of flips that entire thing on its head and says, No, pay yourself. First, it gives you some formulas, and some ideas on how to do that based on your revenue based on the size of your company. Pay yourself first, let's say you're gonna take 10% you pay yourself 10% first, and then whatever's left, you have to figure out how to work with it. That's kind of the idea of the book. And I think it's a great one. The second piece of this of the profit first model is setting up bank accounts, which serve as places to hold money with very specific purposes. So for example, just by dumb luck, this before I read the book Profit First, when we started our company, one of the things I did not want to do is commingle sales tax dollars collected with our quote unquote, regular revenue, I didn't want to look at the bank account and see that we had an extra $50,000 A month there, and then have a big $50,000 month expense, even though I would know that that expense was going to happen. I didn't want to look at that way I didn't want to treat the government's money is my money. I just didn't want to do that. So again, dumb luck, not not that I had some great idea. It just kind of happened that way, where I said, I'm going to set up a savings account. And every week, if we collect, you know, $10,000 in sales tax, I'm going to move that $10,000 into this account, and it's not our money, we're not going to touch it. And that's kind of the idea with profit. First is you may have seven bank accounts that each have a different purpose. You know, one might be department your sales tax, you know, so you can send it to the state or whatever one might be for your federal income, your personal federal income tax, you may put it have an account that takes care of that. You'll have accounts to do a variety of things. So that whole notion is kind of critical. Two things we're gonna talk about here next. The first one would be after getting familiar with your your Profit First Model and kind of how that works and what your parameters would be in things like that is identifying what your personal tax liability and your PAC tax strategy are. So for those who've been listening for a while, you've heard me talk about meeting with your CPA every month, or excuse me, every May, to forecast your tax liability for the next year, what's going to be owed and estimated taxes probably quarterly. And then what we the lump sum due next April 15.
By May your you know, four or five months into the year, you should have pretty good handle on being able to forecast what your revenue profit would be. Your your CPA can help you crunch the numbers for K, here's what your government require estimated taxes are going to be quarterly in June, September, January, and then again in April. And then based on the profit that you were anticipating, here's how much you're still going to owe on top of that. What you'd want to do then is take the profit first model and say, okay, every week or every month, or whatever, you decide, I'm going to put X amount of dollars into a account, that's going to just how's the money for my federal income tax liability, that will be due in April. So let's say you're paying $10,000 In estimated quarterly taxes, and then you've also you've you and your CPF, determine you're going to pay an additional $50,000 in a lump sum next year in April. So you meet with them in May you figure out $10,000, a quarter plus $50,000, on top of that in April, that's $90,000. So you would divide that by how many months are between May and April next year, which should be 10, or 11. If you know what time of the month you did it. And let's just say it's 10, you say okay, I'm gonna owe $90,000 a month and you put $9,000 a month away in this account that does nothing but how's the money that's going to go pay my personal federal tax liability. And then after a couple of years of doing that, you would get a sense for what your quote unquote normal tax burden is going to be each month. You know, of course, it's going to be higher the bigger your businesses, the more it's going to be, but you'll get a sense for what quote unquote, normal is for you. The next thing I want to do is identify your need your goal and your strategy for creating a rainy day fund that meets your needs. So some people just need to have a flat dollar amount to make them feel comfortable, you know, let's say it's $100,000, hey, I'm going to put $100,000 in a checking account or savings account. And that's my rainy day fund. And it's gonna sit there and hope I never have to touch it, that's fine. If that's what works for you. Some people want to have X amount of months of expenses put away, maybe three months of total expenses, or six months of total expenses, which would be pretty lofty goal for most companies. But whatever, whatever your methodology is, for creating a rainy day fund that works for you, then you'd want to know that like what is my goal for having an amount for when the next recession comes. Or if there's a catastrophic, something, you know, fire or flood or you know, some kind of catastrophic thing, or whatever it is, you'd want to know what your strategy and what your need is for that rainy day fund. So then based upon your profit first model that you create, you will take your distribution payout plan, you'll develop a distribution payout plan, whether it's monthly, quarterly, weekly, whatever. And in the beginning, you're gonna have distributions are gonna be broken up into probably four different buckets. One, again, is going to be your personal federal tax liability, your income tax liability. The next one is gonna be your rainy day fund. And then the third one is gonna be how much can we reinvest back into the company, and then we got to talk about how much the owner is gonna make. So owning a business is a stressful thing. It's a risky endeavor, we shouldn't do this for free. So but the good to look at this and okay, if I'm going to pull out, let's say, $10,000 a month and in distributions for profits, how much of that is going to go to my tax liability? How much is gonna go to my rainy day fund? How much you gonna go to reinvesting back in the company? And how much am I going to take home to buy a boat or go to a concert, or, you know, whatever it is, that's going to keep me motivated to do this. So each time a distribution is taken, the formula that you create, or the percentage of what how much can go into each bucket, or the dollar amount that's going to go into each bucket would be the same. So if you have that $9,000 personal tax liability that you get to meet every month, you would hopefully be be pulling out more than $10,000 a month in profit, because you're only putting out $10,000 A month in profit and $9,000 is going towards meeting your personal tax liability. That only leaves $1,000. So let's hope that is closer to let's say $20,000 a month, you'd be pulling out in distributions. And you could say, okay, $9,000 a month is going to go into an account for my personal federal tax liability. And I'm going to put $3,000 a month into my rainy day funds. Now we're $12,000 and I'm going to reinvest, I'm going to split you know 5050 The rest $4,000 A month is going to go in reinvesting into the company and the other $4,000 a month I take home pay.
And that's fine. If that's the strategy you would develop with your $20,000 a month you're taking each month, that's fine, I would really recommend you develop a strategy you stick with each month, though. And it could be, again, just a percentage, you could say, I'm going to take x percent, I'm gonna split it four ways. As long as you're meeting the minimum amount to pay your taxes, I think that's fine. Or you could say I'm going to put aside the, the amount, I need to pay my taxes and split the rest into equal thirds. Third for my rainy day fund, or third for reinvesting in the company and a third for owner benefit or pay, that's fine. The point is, whatever you develop here, let's stick with it, let's create a plan that we're going to stick with and stick with that plan every single time whether you take distributions once a week, once a month, once a quarter, twice a year, once a year, whatever. Stick with the formula, let's not make emotional, last minute decisions, kind of shooting from the hip, let's have a strategy here. And then when you get to a point where you're serious about buying a building for your business, then you would probably want to add a bucket to your your distribution buckets. And you so you'd want to say okay, we're gonna have tax liability, still, we're still gonna have a rainy day fund, we're still gonna reinvest in the company. But now we're going to have a building Investment Fund, we're going to put money in for the down payment. things for you know, ti the tenant improvements that need to be have that need to happen when you buy the building. Other things that may go into it, you may have to pave you may have to fence you may have to do whatever the likelihood you're going to find a building that's just perfect for your business, doesn't require any tenant improvements doesn't require any outdoor improvements. I hope that works for you, I don't think it's likely to count on that, or it's not healthy to count on that, because it's probably not super likely to happen every time, you're going to have to invest in something, you had to reconfigure their offices, you'd have to add walls, take out walls, it'll need a roof, it'll need a driveway or something. So we just need to add a bucket when we get close, you know, within a few years. So start putting money aside, when we take distributions and put them put that money towards the real estate thing. Now, you may also as that happens, you may be getting close to your rainy day fund where you don't have to add as much of that maybe you can taper off on the rainy day fund and put more into your building fund. And that's fine. And then the last thing is once you kind of have that rolling, and you get within a place where you're within a couple of years of buying the actual building, then you're gonna want to run through your plan with your CPA and your banker just to make sure you haven't overlooked anything. And that way you just have a couple years you have time to adjust if you've if they're like, Hey, your little light on the down payment amount that you're thinking you're thinking of building is going to be available for a price, it's not reasonable. You know, maybe you were hoping to only spend 600,000, they're like, No, it's gonna cost you 1.2 To buy a building that you're looking at, or whatever, they will be able to help you understand that stuff. So those are the things that I would recommend, considering when you're talking about do I reinvest money back into the business or reinvestment into real estate? Again, one of the first things is, where's the better bang for my buck, if I'm going to have 50 employees and I have 34, then yeah, maybe I start looking at having a building, if I want to have 50 employees, I'm at 12, I probably would be better off adding the the higher number of employees for right now. Or you gotta lay and yet look at how many years are going to take you to save up the downpayment, things like that, you know, if you if you if you want to do it, when you're around, you know, 20 employees on your way to 30. But it's gonna take you some time, then you might decide you have to start saving earlier. So none of these things I'm talking about are set in stone, these are just the things I would recommend considering as you develop your strategy. So the first thing you got to do, again, this is the most overlooked, most often overlooked. It's, it's one of the more challenging things until you do it. And again, if you need help with it, that's something I can help you walk through. But you have to develop an understanding of what your company is ultimately going to look like. Whether it's five years from now, 10 years from now, 20 years from now, at retirement, whatever.
And as with any planning you're going to do this is one of the critical first steps, what is this thing gonna look like? So I know when to pull the trigger on some of these other things. And overlooking this causes a lot of confusion. One of the examples I use is I would defy any person to walk into a kitchen when they're hungry, and prepare a meal without first declaring what they're gonna make. It's not possible you at some point, you're gonna say okay, let make lasagna, I want to eat Top Ramen, I'm gonna make a hamburger and then you start making the thing up until the moment you declare what you're gonna make though. You can't begin cooking anything. You can't just you can't randomly go into a pantry and just start pulling out you know, pasta and peanut butter and raisins and you know, flour and it just doesn't work that way. It's the same thing with building a business. You can try to hodgepodge it together as you go in It's much better to declare at front, what are you going to make. So that's the first step with this, when you're talking about buying a building for your company is when is the right time to buy? Well, that depends on how big of a company you're trying to build and where you're at relative to that. So again, first thing, develop an understanding what your company is ultimately going to look like. Second thing, get familiar with the Prophet first model, read the book, you might read it a few times. It's not a hard or lengthy book, you can read it in a weekend. Some of the ideas are, are seemingly counterintuitive. Some of them make perfect sense, you'll you'll understand that once you kind of get into it. But I really implore you to read that book. It's a fantastic way to kind of shift your thinking on how to how to compartmentalize money so you understand what money is being set aside for you understand where money is at where you're at, relative to the amount you need to save, and it's just it's very helpful for that. Third thing, identify your personal tax liability and your strategy for paying that. Again, after a few years, you'll kind of get to know what what quote unquote normal is. Meet with your CPA and in May forecast, start setting aside meet with the CPA again in November, October, November, somewhere in there, make sure that things are on pace, make alterations if you need to, you have still have several months to make some changes before April when you meet with them in October or November. Identify your need and strategy for creating a rainy day fund. How much do you need to be to feel safe? Do you want the are you that person says I need 50 grand Are you that person says I need five months of expenses. And then once you get close to within a couple of years of actually pulling the trigger on making a building purchase, then I'd say fine tune your plan with your CPA and banker and just make sure there isn't anything you've overlooked. So that's it for this week. I just want to say thanks again for everyone who's taking the moment to give us a rating and a review. And if so, subscribe and share this with our friends. Your friends are our number of listeners is going crazy right now. That's awesome. Thank you very much for that. I really appreciate it. If you haven't had a time yet, please give us a rating review. Make sure you subscribe. You can also subscribe to our rumble channel rumble.com/service industry success. Make sure you follow our Facebook page facebook.com/service industry success. And again if you know a friend who or colleague who's a business owner in the service industry, please share this podcast with him. We want to help as many folks as possible. And thanks a lot for everything this week, and I'll talk to you all next week.