By Phil Harwood
It’s a serious question and I would appreciate your thoughts. As the calendar year comes to a close, there is a dilemma facing some (not all) contractors. What should I do with all of this profit? I was recently asked what to do with $2 million in profit. Here’s my advice.
Some of you are struck by the fact that a contractor has $2 million in profit that he doesn’t know what to do with. As it turns out, this particular contractor generates $2 million in profit most every year because of his strong financial management practices. Over the years, he has become educated and put in place systems that make this level of profitability reliable - expected. If you would like to become more educated in this area, please check out our Financial Management course. If you’re not yet a subscriber, feel free to use this link for a free 30-day All-Access pass.
Every situation is unique but I knew this person well and was confident in my response to him. I knew his business was growing and would need to buy more equipment so my first thought was to buy more equipment. Of course, this is an old standby technique to avoid getting crushed by taxes. However, tax implications aside, buying equipment has other benefits. Buying the right equipment makes us more productive and even more profitable for years to come.
Replacing outdated equipment is another consideration. This may include machinery, work tools, or office equipment. Older, tired equipment is not only inefficient but may be painfully frustrating. Just ask someone using a computer that’s more than a few years old or the admin who has to call the copier repair technician on a weekly basis to fix the old copier. New equipment says “I care about you” in a very tangible way. Work with your accountant to determine your best option for financing and accounting regarding the acquisition, capitalization, and depreciation of new equipment. Also, check out our free Equipment Management course to learn more about how to effectively manage equipment.
Another great way to spend down some of that big profit is to max out everyone’s retirement plans and bonuses. Spread the wealth with those who helped generate the profit in the first place. There will be obvious tax implications so become educated about what these are and share your knowledge with those affected. If you haven’t yet established retirement and bonus plans for your company, now may be the perfect time to do so. These are excellent vehicles and should be part of your financial management plan.
Maybe even more visible and impactful is to upgrade office furnishings, office spaces, break rooms, common areas, etc. My previous company did this in a big way by moving its administrative and executive teams into newly-renovated high-rise offices, complete with glass conference rooms, coffee bar, floor-to-ceiling glass walls with panoramic views of the city, covered parking, and more. Working in a beautiful, spacious, and inspiring office environment impacts productivity and retention. Take a look around. Ask your people. Surely there are some things that could be upgraded and have a meaningful impact.
In addition, one of the most significant investments I always recommend is the professional development of people. As nice as it is to have new equipment, bonuses, and nice offices, it’s even better to have awesome people who are highly engaged. We created GrowTheBench.com for this reason. If you’re a subscriber but not fully utilizing GrowTheBench.com with your staff, let us know what we can do to assist you with integration. If you’re not yet a subscriber, take us for a free test drive by using this link for a free 30-day All-Access pass.
There you have it. Now I’d love to hear from you. What would you do with $2 million in profit? Please email me at Phil@GrowTheBench.com.
Now go forth.
Tags: Profit , Surplus , Money , Depreciation , Invest ,