May 25, 2020
Reasons to Leave Money in Your Business
We all know the purpose of opening your own business is to keep as much of the profit of that business in your pocket;
along with the benefit of being your own boss, you should get the majority of the money you make in the business. But there are some instances where it may make more sense to keep some money IN your company:
One reason may be simple common sense savings and cash flow planning. For younger companies, you're often operating in a "hand-to-mouth" fashion, spending pretty much all the income you make within 30 days of receiving it. Leaving some cash in the company instead of withdrawing as payroll or equity draws will help keep your credit healthy and give you the ability to spend on the right things at the right time.
Another good reason is the health of your Balance Sheet; this is a financial report often overlooked by many business owners which actually often paints a better picture of the overall company's health. This document lists your assets (such as bank accounts and equipment), liabilities (money you owe), and equity (the accumulated investment in the company).
This will be crucial information for any lenders or partners you may be dealing with to gauge whether your company is worthy of credit or investment. If you are showing a lot of liabilities but very low assets and equity, then lenders will view you as a bigger risk and either deny or give unfavorable credit terms on loans. Similarly, if your equity section shows that you are pulling money out of the business as fast or faster than you make it then potential investors will be less likely to want to put their money in the business.
The best practice is to maximize your assets (especially cash assets) and minimize your liabilities while also showing that you are keeping money in the company.
As with anything, balance is a key consideration: you want to keep the right amount of money in your company, not just accumulate cash for the sake of stacking higher assets. Keeping a lot of money in a basic checking account doesn't benefit you at all; it earns you no interest and doesn’t increase your investing portfolio.
Everyone has different goals and needs. Formations can assess your individual financial situation and advise on the best way to maximize your company's health, efficiency, and profit year over year.