What percentage of profits should go back into operating costs?
I wish it were that easy.
- Profits are what’s left over after operating costs (including direct and indirect costs, costs and expenses, cost of goods and services, fixed and variable costs — there are lots of different breakdowns and classifications) are spent. So technically profits don’t go back into operating costs.
- Profits aren’t actually money. They’re an accounting concept. Cash flow is what determines money, and if you’re going to be in business you have to manage cash even more than profits. You can have sales without getting paid, and you can buy things without paying (at least temporarily), and you can pay for things way before you get paid for them.
- And you are on to something, in that you need to have money available to be able to pay your obligations in the future. Technically that’s working capital, defined as current assets less current liabilities, but in the real world, it’s about the same as money in the bank.
- What people do about it is called planning your cash flow. You’re watching that flow so you have enough money left over. It’s also called a cash plan.
- Happily, I just finished 10 Critical Cash Flow Rules as my most recent monthly column on entrepreneur.com, and I think it will help. You could also go to ww.bplans.com and do a search for “cash flow,” and make sure you see the cash flow calculator among the business calculators there (free).