Written by Jeremy Smith
In order to plan ahead in life financially, we must determine if our exit strategy is obtainable based on both present and future cash positioning. This article will walk you through two illustrations of maximizing discretionary spending, one from the consumer point-of-view (POV) and second from a small business commercial POV.¹ For consumers, it is as simple as balancing discretionary monthly income by transferring extra funds to a simple basic savings account that you opened up at your local bank. Similarly, advisors at TwoSmith Capital are trying to help small business owners solve the problem of how they can reinvest their profits into retirement assets or trying to plan key strategic business growth initiatives driven by cashflow.
From the consumer angle, leftover disposable² income should fund pivotal life events for your family like college tuition planning, marriage, or even funerals. From the business vantage point, profits could be used to purchase the real estate where you are currently operating your business. For most Americans, these planning notions might seem obvious. However, if you were raised with low socio-economic means or just above the poverty line, your reality would be different. Conditioning ourselves to use discretionary income habits to buy investment real estate, as a way to finance our life events now seems like pure fantasy. So the immediate thought is to become an entrepreneur. Entrepreneurship is about decision making. It allows you to create your own path, letting you dictate your financing decisions. So you can give yourself daily cash flow. Thus, starting a small business now makes sense”.
When determining whether or not profit is feasible for the small business owners, I think about the financial issues: collateral, retirement, and leverage. For example, let’s assume my business has positive net EBITDA³ which is a term that finance professionals refer to when it comes to speaking about taxable income with companies. Then, it circles back to the notion of what was my exit from starting this venture. Your exit strategy simply means you have a plan to sell, retire, or divest the business such that you gain capital from any of your decision choices. Does one buy assets to improve the collateral stance in my business to banks if I choose to pursue small business lending?
Does one buy the real estate where the business is currently operating to give myself a way out of paying rent? What about investing in key personnel and growing bottom line profits by financial incentive planning for these same employees? The solution for small business owners is to pencil out a version of scenarios that would apply to their businesses and be prepared to implement these same strategies mentioned. These are just a few ways to potentially reuse or “recycle” profit. We must have this mindset when starting a business if net positive income and profits are our main objectives.
My stance is simple with discretionary income and profits matter because it could create a generational economic mindset in your personal life. From a business POV, it also matters because it is teaching the correct principles of entrepreneurship4, which is start and exit a profitable venture. This is what we are ultimately judged on in our social circles and business valuation experts; Success is measured in a monetary value and currency. You must have the mental stronghold to strive to want to be profitable, as it relates to money management in personal and business decisions with cashflow at stake. If you are running a business, but never see dividends, then you essentially have a job. There is no freedom.
One can only gain a sense of freedom by having the flexibility to digest and apply discretionary income practices both personally and professionally. Remember your decisions in life and business will help you recycle your profitable ambitions into reality.