These are the only three outcomes of owning a business.

All of us regularly see blogs and articles on “Why own a business” – often the reasons include challenge yourself or feel a sense of pride; the outcomes are very short-term focused, and emotionally oriented – giving little or no consideration to an eventual exit strategy.
Business is commerce; it is all about the flows of money from one to another.
Consequently, at the end of the day, there can really only be three outcomes from owning a business:

  1. to make money
  2. to lose money
  3. to break even

As a business owner your aim is to ensure more flows towards you than ebbs away from you. This may be stating the obvious, but there seems to be a lot of alternative opinions, and sometimes some very odd expectations being created.
Accordingly, let’s re-set the scene – when we buy an investment property we want it to do two things:

  • Provide rental income
  • Increase in value so we profit on the sale

at any point in time one may be more or less of a focus than another, but balancing these things underpins the purchasing, maintenance and selling decisions.
We take a the risk the property market will increase, that renters will be available and not ruin the place etc etc. As a result we hope to get a higher return than simply leaving the money safely in the bank.

Why own a business?

Just like with an investment property, a business also provides two ways to make us money:

A. The stream of INCOME

Renting your investment property generates an income stream, so should your business:

  1. Work within in the business and pay yourself a “salary” for the hours you contribute.
  2. Create a business that generates dividends – ie money flowing into your door without you having to actively put in time for it. Yes you are a shareholder in your own business, and for taking the risk of making the initial investment of shares in your business you are entitled to returns.
B. The saleable ASSET

Also known as capital gains, all businesses have a value; and ideally that value increases over time. Initially the value may be $0 but once you are generating profit and the ‘secret recipe’ of your business begins to be documented that value starts to increase, and continues to wax and wane depending on how you approach your management of this asset.

 
At some stages of a business life an owner may actively work to reduce tax (which usually means reducing profit too) but doing also impacts the overall sale value of the business. I see this as a bit like leaving your investment house unpainted so you receive lower rent and don’t have to pay so much tax – most people will give it a spruce up to ensure they maximise their price.
If you are not planning for one, or both of these ways to make money, you had best go get yourself a job…

C. Of course the business may also enable you to do what you LOVE

But if this is your ONLY reason for owning a business then I wish you my congratulations. Congratulations that you are independently wealthy enough to go about doing what you love without having to worry about the costs, or future returns….

OK I may be being harsh here BUT by making the decision to be a business owner you are increasing your RISK as well as your control over how and when you make money!
It is the risk factor that is almost always downplayed; by taking a bet that you will get the upside from the gamble is the true reason you go into business – any other purposes for owning a business can be met in other ways usually with lower levels of effort and fewer hazards.

[box type=”info” style=”rounded” border=”full”] Real business magic can happen when all three come together, and over time focus and needs will change. Clarifying what you currently want from your business, as well as keeping in mind the longer term sale value, enables you to make better decisions for meeting those needs.[/box]

Right now, are you focussing on any, some, or all of these business results?

 
 

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About the Author

Why own a business post - Eve Blackall Smart Accounting image
Often described as the small business answer to The Supernanny, our principal Eve Blackall also owned a Tax Accounting Practice for 15 years and worked as Financial Controller for various ASX listed companies.
Working with Smart Accounting you get to work one-to-one with Eve and not many consultants have her experience and expertise. She has been advising on how businesses can be more profitable, and how business owners can sell for the highest price, for over 25 years.
To start increasing the value of your business right now download one if our Free Business Checklists by clicking here.

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