Pay Dirt!

This story appears in the
November 2003
issue of
Entrepreneur. Subscribe »

Imagine you just made a profit. Now, imagine the worst thing
that can happen to your new company during the next few days, weeks
or months. Think of downturns in the economy or of losing your one
big account. Think locusts. Think plagues.

OK, now go spend your money.

When it comes to knowing what to do with the first dollars you
earn, it’s likely nobody has to tell you. Once the bills have
been paid, that profit needs to go back into your business. But
where exactly should you put it? Your money could go to stocking
your inventory or hiring your first employee. You could upgrade
your computer system or buy a more comfortable office chair. You
could even spend it on advertising. The possibilities are
limitless, but unfortunately, your budget isn’t.

The average business doesn’t even make an actual profit
until after its fourth year, according to Brian Tracy,
author of more than 26 business books, including The 100 Absolutely Unbreakable Laws of Business
Success
(Berrett-Koehler Publishers). “You have two
years of scrambling, two years of getting [to the break-even
point], and in your fourth year, you start to make a profit,”
says Tracy, who has spent more than 30 years speaking and
consulting on corporate issues.

Chances are, if it takes four years to become profitable,
you’ll want to invest any extra money in the development of
your company as soon as you possibly can. So, to crib from that old
TV game show, the $64,000 question is: Where should you spend that
first $64,000? Or, if you’re not fortunate enough to have that
much profit, your first $64?

Unfortunately, there isn’t just one simple answer. If there
were, of course, the secret would have been out years ago, and we
would all be filthy rich. But some solutions for investing that
first dollar are smarter than others. Here are just a few of
them.

Build It Up
For a business, the term “infrastructure” can mean just
about anything from inventory to new computer equipment to making
sure you can transport goods from one place to another. But the
bottom line is that improving your infrastructure improves your
bottom line. Wherever most of your energy goes, that’s likely
the most vital component of your infrastructure. For Robin
Kershner, that means inventory.

Kershner, 43, owns Fox & Hounds Ltd., an Alexandria, Virginia,
company with seven employees. Her business designs fashionable pet
accessories and, in 2002, the company brought in $1.5 million in
sales, $100,000 of which was pure profit. If pet owners need a
fancy dog bed, collar, leash or dog toy, Kershner’s firm
provides pet stores nationwide with all that and more. But if she
gets an order and doesn’t have product in stock, she risks
losing money and her reputation.

Securing enough inventory has always been where her profits have
headed-ever since a little disaster a few months into her business.
“I remember the first Christmas trade show I went to,”
says Kershner, who launched her business in 1996. “I got more
orders than I could handle.”

It sounds like the type of problem you want, but Kershner sees
it differently. “I didn’t have inventory in stock to ship,
and it took time to get orders out the door, and people
canceled,” she says. “Having inventory in stock and being
ready to ship the next day is the best way to make people happy and
increase your cash flow.”

Kershner was also smart not to expand her inventory too quickly
and incur more costs for order shipping and storing. She began by
offering collars, leashes and bedding; it’s only this year that
she’s diversifying into pet carriers, toys and other novelty
items, such as squeaky toys.

Of course, you may have plenty of inventory, but if your dying
computer or transportation problems are threatening your firm’s
efficiency, then that’s also a problem in your infrastructure.
Or maybe you have a phenomenal product, but you lack customers.

“One thing that can help is to invest a little of your
money into promoting your business. Almost every business can use
some kind of public relations,” says Fred Siegel, a New
Orleans financial analyst who owns his own investment firm, The
Siegel Group, and whose radio show, Talking Money, is heard
throughout much of the South on CBS Radio. Advertising is where
Siegel says the first profits should go-after paying the bills and
investing in your personal future with an IRA or your own
individual 401(k), that is.

“Spend your money only on those things that will help you
earn more money,” says Tracy. “In other words, you
reinvest-not in your office furniture or car or the premises, but
[in] more products, better packaging, advertising, training and
salespeople.”

“Number-crunching is the best exercise for keeping you in
line,” says Kershner, who still hasn’t laid carpet in the
parts of her office space where visitors never tread. And when
money comes in, she adds, “You have to carefully parcel it
out-but then that’s why you have a business plan, so you can
see what cash you need and when.”

Always consider your finances when you think of putting your
profits into improving infrastructure, says Bob Oberstein, managing
partner of Oberstein, Stock & Friedenthal LLP, a tax and
accounting firm in Los Angeles. “If your books and records are
shoddy, you may not know what you have,” he says. “And in
many cases, when businesses don’t analyze their financial
situation, they realize [later] that they might have made money if
they had been keeping an eye on things.” If you’re dazed
and confused when it comes to finances, says Oberstein, hire a
professional to help with the books.

Stash Your Cash

It may be the last thing you want to hear, but the best way to
spend your profit is not to spend it. “Cash is to a business
[as] oxygen and blood are to the brain,” Tracy explains.
“You must conserve your cash at all costs.”

That’s what James Wright, 36, did, and he’s not
complaining. He’s a partner of Bridge Technical Solutions LLC,
an IT staffing company, which he bought in June 2002 with Joe
Devine, 42, who’s also a partner. They’ve been growing the
Providence, Rhode Island, firm ever since. Bridge Technical
Solutions brought in about $1 million in sales by the end of 2002,
with profits of about $50,000-and the great temptation was to spend
a lot of it as it came rolling in.

But they listened to their accountant and put most of their
profits aside for the following (in this order): taxes, cash
reserves and paying down debt.

Wright adds that just because your books say that your company
has a $5,000-or $50,000-profit, it may not all be in your account.
“Our money is tied up in paying off payroll in advance of
receiving payments from our clients,” notes Wright.
“Profits don’t necessarily mean ready cash. You have to
plan for how your money is tied up and realize that even if
you’re profitable, you may not benefit from it right away in
terms of having money to spend.”

Last year, Wright and Devine reserved about 30 percent of their
anticipated profits and put that straight into paying down their
taxes. Then they each took out another 5 percent to help them catch
up on their personal finances.

But usually, explains Wright, the partners kept whatever extra
cash they had on hand available “because in our business, cash
requirements are always rotating every pay period, and you never
know when it’s going to be another crunch time.”

Dollars and
Cents
So you’ve made your first
dollar, and you’re trying to figure out what to with it. If
you’re stuck, who better to ask than a banker? We asked Robin
C. Paterson, senior vice president and chief credit officer of
American Business Bank in Los Angeles, how he would suggest
spending that first dollar of profit.

First, he corrects us, the idea is to invest, not spend.
“That first dollar of profit is really your first addition to
capital, and it should be invested to ensure the second dollar and
future growth of the company,” he says. So if Paterson was
back to making his first buck, in an ideal world, here’s where
his cents would go:

  • Sales (marketing, hiring employees), so you can develop
    your business: 60 cents
  • Infrastructure (customer service, communication
    systems), so you can keep your business: 25 cents
  • Product development (new products and services), so you
    can maintain a competitive edge: 8 cents
  • Technology (enhancing what you already have), so you
    aren’t left behind: 5 cents
  • Professional services (accounting, legal), so you can
    keep everything legal and under control: 2 cents
    Grand total:$1.00

Get Help

Robin C. Paterson, 41, is an unusual entrepreneur. After all,
how many guys do you know who have started a bank?

In 1998, Paterson and his four partners-Leon Blankstein, 44;
Donald P. Johnson, 57; Robert F. Schack, 56; and Wes Schaefer,
52-pooled their money and co-founded American
Business Bank in Los Angeles with $50,000, each contributing
$10,000. Then they raised the rest of their start-up capital until
they had accumulated about $14 million.

That doesn’t seem like a hardship, but when you’re
opening a bank, $14 million isn’t a huge amount. In their first
month in business, they lost $212,000; the next month, they were
another $228,000 in the hole. Paterson, senior vice president and
chief credit officer, says that for the first months when they were
still raising money, the five of them worked in an 8-by-10-foot
office with one desk and two chairs, and nobody drew a salary.

After they opened in 1998, it took them 13 months to make their
first profit of $2,365. “Once you’ve made that first
dollar, it’s no longer a dream,” says Paterson.
“You’ve become a real business. You’ve crossed
over.”

The priority for their profits was to bring in more employees.
“That’s still our biggest challenge, to find good people
to help us continue to grow,” says Paterson.

In the beginning, of course, you may hardly be able to pay
yourself, let alone somebody else. Which is why employee
recruitment expert Clark Waterfall recommends nepotism. “Your
brothers or sisters or in-laws have some free time, and you can pay
them on the cheap, and they’ll work out of your basement,”
he says. “This can work for the very early stages of a
business.” But even though they’re your relatives,
don’t hire them unless they can be professional.

Once your business starts to grow, then you can worry about
finding better talent, adds Waterfall, managing director and
co-founder of Boston Search Group Inc., a Boston company that
recruits executives and professionals in technological fields.

“Turning over employees across the growth curve of a
company is not a bad thing,” explains Waterfall.
“It’s like clothes. You don’t wear the same clothes as
a teenager that you wore when you were a toddler. You have
different needs [as your company grows], and very few employees
have that much Spandex, or elasticity, in them.”

Even with $14 million fueling them, these bank founders could
only afford one teller when they really needed three, so the
executives helped out when necessary. Because they only had one
teller, Paterson says, their bank couldn’t offer all the
services you’d expect from a full-service bank.

And while they wanted to hire a full staff, they operated
conservatively and didn’t hire a second teller until six months
had passed and business was thriving. Nine months later, they
reached their magical number three. Admits Paterson,
“We’re in reactive mode when it comes to
overhead.”

The Land of Milk and
Money

Today, American Business Bank manages $350 million in assets, and
while Bridge Technical Solutions and Fox & Hounds aren’t
anywhere near that level, the entrepreneurs behind both businesses
feel they’re on solid ground.

Wright is careful to make sure he earns enough to treat himself,
and Kershner, who routinely jets off to places such as London and
Hong Kong to meet with her manufacturers, enjoys the travel that
has become one of the perks of her business.

Additionally, “I’ve been able to give bonuses and
raises to the staff, which was wonderful,” says Kershner.
“And we can do nicer things for the staff, like stocking the
refrigerator with sodas.”

In short, Kershner’s business is thriving because she had a
little foresight in the beginning. She was cautious with her money
and tried to see what the future could be with it. Thanks to her
foresight, her future looks bright.

Be Good to
Yourself
You might think it’s a
rich man’s world, but the point at which your company finally
makes a profit is not the time to start living high on the
hog.

“Making a profit after not making a profit for a long
time-it’s like a drug to the brain,” says Brian
Tracy, a prolific author and publice speaker on numerous business
issues. “There’s a natural tendency to associate spending
or buying stuff with rewards-Christmas, birthdays, getting a
new car. Sometimes entrepreneurs will take an expensive trip; often
they’ll buy a house. It’s a very heady thing, to make your
first profit.”

Of course, that doesn’t mean you can’t be good to
yourself-just remember to do it within reason and, even
better, make sure there is a reason. James Wright, president
of Bridge Technical Solutions LLC in Providence, Rhode Island,
fondly recalls blowing a significant wad of cash on a big holiday
dinner last December. “We went out with my partner’s wife
and my girlfriend,” says Wright. “But it wasn’t just
about pampering ourselves. It sent a [positive] message to my
partner’s wife. Here are two guys who feel comfortable to do
this and can talk positively about their business. It was important
that we did that.”

But going out for dinner every night or every week? That may not
be such a good idea. “Now that you have won, it’s
important you don’t lose,” says Tracy. “I have a
friend who is an entrepreneur. He bought a BMW, a $40,000 car, and
the next month his business took a dip, and he went into a complete
panic. A few months later, his business was gone. Once you put the
cash in a new car, you can’t get it back.”


Geoff Williams
makes a living as a full-time freelance journalist and is sometimes
even profitable.

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