The goal of most businesses is to make a profit. And for a small business owner like me where my wife and I are the only shareholders, the goal is to make enough of a profit to support our desired lifestyle. The keyword here is ‘enough’.
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So if you’ve made ‘enough’ of a profit and you’ve made some additional profit over and above what your ‘enough’ number is, what should you do with this surplus?
For a lot of business owners, the obvious thing to do is to reinvest surplus profit back into the business. You could do this by:
- Hiring more staff to increase your capacity.
- Spending money on ads to generate more leads.
- Purchasing additional stock.
- Upgrading your office space and equipment.
- Any number of things… all of which sound like good ideas.
But, do you have to invest surplus profit into your business?
As I said, it’s the obvious thing to do; If you’ve made a profit, why not reinvest some of it so you can scale and grow the business? Make sense, right?
Well, if you’ve already made ‘enough’, then do you really need to scale your business? Do you want this additional responsibility and possible stress? Is there a better option?
Instead, could you invest the surplus profit into an asset that’s going to generate a passive income or capital gain?
In his book, Rich Dad, Poor Dad (read my book summary), author Robert Kiyosaki describes three types of income: 1) Earned income (e.g. from your salary or business income) 2) Passive income (Income that doesn’t require active work to generate e.g. income from a rental property) 3) Portfolio income (e.g. capital gains from owning an asset that appreciates in value).
If you’ve earned an income from your business, you could reinvest it to grow your earned income further. But why not invest it in an asset that’s going to generate a passive income or capital gain?
I’ve been doing this with Bitcoin for the last 4 or so years. I’ve directed a portion of my surplus profit from the business into Bitcoin (don’t worry, I’m not going to try and convince you to buy Bitcoin). You could use a portion of your profit to buy some shares, commodities, bonds, property, or whatever you feel comfortable with.
Now of course, you'll want to leave at least 6 months' worth of cash in the bank to finance your operations. And maybe you should invest some profit into hiring another team member or spending money on ads if it makes sense to do this. But some of this profit, you could use to grow your portfolio or passive income.
By diversifying your income and generating passive or portfolio income, you can de-risk your business. If you receive some income that’s not generated from the earned income of your business, you have a security net to fall back on if your earned income drops off.
Plus the passive or portfolio income often doesn’t require operational overhead or work. And when you can use your profit to make more income, without the extra work, this is (I think) the path to true wealth creation.
This is how I view my business now. We offer Asana and Pipedrive support services to generate earned income for the business. The business invests the surplus earned income to generate passive/portfolio income that requires no work. I’m not against doing work; we work very hard to generate our earned income. But I am a big proponent of getting the best ROI on my time and energy. And if there’s an option to grow my income through passive means, this sounds good to me.
My goal over the coming years is to get to the point where the passive/portfolio income surpasses the earned income of the business.
If you’re a business owner who’s earning an income. Consider how you could use your profit to generate passive/portfolio income completely separate from the operations of your business.