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How to Handle Excess Profits

by Hal Levenson on Apr 17, 2015 11:20:00 AM

maximizing-profits

Imagine your business is pushing out excess profits.  Business owners often dream of such times.  Every now and then, we get an owner asking us what to do now that they find themselves with a robust bottom line. 

Here's an approach we've seen work across many companies and industries.


Consider building it into your annual plans so you'll not only be prepared but also be driving to a great result.  It's three simple steps:

  1. Place one-third aside for your owners or shareholders as a return on their investment.  Make sure you include yourself in order to establish personal financial independence and stability. 
  2. Keep one-third with the company for future investment.  Make sure you properly capitalize the business areas that need attention and will produce results.
  3. Put the last third into an employee profit sharing pool.  Your people are your greatest asset.  You want to ensure they continue to produce for you.

 

Before you jump in however, take time to evaluate four important questions.  Your answers will influence your allocation to each of the steps and when you might take action.

  1. Is your company financially healthy?  Consider the points below and read our article 'The Most Important Financial Indicators Every Business Needs toKnow'.  Calculate the stability (Debt-to-Equity) and liquidity ratios (Current Ratio) for your company.  
  2. Do you anticipate any large capital expenditures in the near future?  Take a look at your capital expense budget to make sure you are adequately funded.  Ask your department heads to gain a sense of their people, equipment and space capacity needs.  
  3. Did something happen this past year that makes you think the excess profits are one-time and not repeatable?  Basically, you need to determine if the current performance is a fluke.  Take a hard look at where your business is in its life cycle.
  4. Will investment into specific business areas and profit sharing motivate your employees to be more engaged?  If your people are your greatest assets, then you want to be sure your investment in them will cause them to give the extra effort when needed.  

 

To get the full free paper; contact Hal Levenson at 609.688.0428 or hlevenson@gettrilogypartners.com.  

 


 

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