Managing a business involves a series of strategic decisions that not only determine its daily operations but also its ability to create long-term value. One of these key decisions is how and when business owners should withdraw profits from the company.
Extracting earnings can be a legitimate and well-deserved way to reward oneself for the time, effort, and resources invested, as well as for the risks taken when starting a business. However, this decision should not be taken lightly, as withdrawing profits prematurely, disproportionately, or without proper planning can jeopardize the business’s sustainability, its future growth potential, and even its operational stability.
In many cases, business owners face a dilemma:
¿Is it the right time to enjoy the fruits of the business, or would it be wiser to reinvest profits to drive growth?
This decision can be even more critical during the early stages of a project when revenues are not yet consistent, and resources are often more limited.
Stages of business maturity
The ability to extract profits from a business is closely tied to the stage of development the company is in. Generally, a business goes through four main stages:
I – Start-up
During the start-up stage, resources are almost exclusively allocated to establishing operations, developing products, and penetrating the market, making profit withdrawals imprudent or even unfeasible.
II – Growth
In the growth stage, the business begins to generate higher revenues and profits, but these are mostly reinvested to expand operational capacity, reach new markets, or strengthen its position in the industry.
III – Maturity
It is in the maturity stage that businesses reach a point of financial and operational stability. At this phase, revenues become more predictable, costs are usually optimized, and the need for reinvestment decreases, allowing owners to consider extracting profits without compromising the sustainability of the business. However, before proceeding, it is crucial to conduct an evaluation of liquidity and cash flow. This involves ensuring that the business has sufficient liquid resources to cover its short-term obligations, such as debts, taxes, and operational costs. A detailed cash flow analysis will help determine if there are surplus resources available without jeopardizing operations.
Additionally, at this stage, business owners must prioritize fulfilling financial obligations before considering profit withdrawals. This includes ensuring that all economic commitments are met, preventing resource withdrawals from jeopardizing the stability of the business. Only when these conditions are met can a responsible balance be achieved between profit distribution and reinvestment, thereby ensuring the company’s long-term sustainability and success.
IV – Decline or renewal
Finally, in the decline or renewal stage, profits may decrease due to factors such as changes in demand, the entry of new competitors, or the obsolescence of the business model. At this point, the priority shifts to strategic renewal to ensure the continuity of the business.
¿How do entrepreneurs make profit today?
- Salaries and Bonuses: In many businesses, owners who take active roles in management often assign themselves salaries and bonuses as a way to generate personal income. This practice allows them to receive fair compensation for their work in the company while ensuring that a portion of the profits is reinvested to support the company’s growth and stability.
- Dividends in Public Companies: Dividends are usually distributed when a company has reached the maturity stage, a point where its revenues are stable and predictable, and the need for reinvestment is significantly reduced. At this stage, the company has optimized its costs, consolidated its market position, and generates consistent cash flows. This allows owners and shareholders to withdraw part of the profits without compromising the business’s growth or operations.Example: Apple Inc. At Apple, shareholders like Tim Cook, who also serves as the company’s CEO, receive dividends in addition to their salary, benefiting both from the company’s operational success and its distributed profits.
- Sale of Equity Stake: A common strategy used by business owners to extract significant profits without completely relinquishing control of the business is the sale of part of their equity stake. This method enables owners to monetize some of the accumulated value in the company while continuing to participate in its operation and growth. It is particularly useful for diversifying personal income sources or funding other projects while maintaining a strategic position within the company. Example: Elon Musk (Tesla and SpaceX):Elon Musk has sold small portions of his equity stake in Tesla, allowing him to finance other ambitious projects such as SpaceX and The Boring Company without compromising his control or influence within Tesla.
Extracting profits from a business can be a rewarding decision, but it requires careful planning and evaluation. The key is to ensure that the withdrawal does not compromise the business’s operational stability or growth opportunities. Owners must prioritize the company’s sustainability and financial health, strategically reinvesting in the early stages and withdrawing profits only when financial conditions allow.