WEBVTT 00:00:05.950 --> 00:00:09.250 Hi, everyone. This is the How to Lower Your Tax 00:00:09.250 --> 00:00:12.449 Bill podcast. I'm your host, Terrence Hutchins. 00:00:12.929 --> 00:00:15.410 I'm a financial and tax advisor in the Dallas 00:00:15.410 --> 00:00:18.210 -Fort Worth area. And the goal of this podcast 00:00:18.210 --> 00:00:20.789 is to help you listeners get educated on different 00:00:20.789 --> 00:00:23.589 tax strategies that you can implement to improve 00:00:23.589 --> 00:00:26.730 your tax situation immediately. Each episode 00:00:26.730 --> 00:00:29.769 will break down useful tax tips you can use to 00:00:29.769 --> 00:00:32.380 save money. no matter what your personal or business 00:00:32.380 --> 00:00:35.340 income situation. Because our motto is, keep 00:00:35.340 --> 00:00:38.560 more of what you earn. So let's get into today's 00:00:38.560 --> 00:00:47.240 episode. All right, so welcome back to how to 00:00:47.240 --> 00:00:50.219 lower your tax bill podcast. We have been going 00:00:50.219 --> 00:00:53.679 over a series talking about how to utilize your 00:00:53.679 --> 00:00:56.020 business profits, which hopefully you have them. 00:00:56.539 --> 00:00:58.719 FYI, but there's really five things we've been 00:00:58.719 --> 00:01:00.659 going through. It's how you can use your profits. 00:01:00.799 --> 00:01:03.560 So we've been talking about taxes as an expense, 00:01:03.820 --> 00:01:06.019 utilizing debt wisely. Today, we're going to 00:01:06.019 --> 00:01:09.099 get into reinvesting your profits back into the 00:01:09.099 --> 00:01:11.000 business. All right. And then our last two, we're 00:01:11.000 --> 00:01:12.959 going to talk about how much should you retain 00:01:12.959 --> 00:01:15.299 in the business? And then how much should you 00:01:15.299 --> 00:01:17.819 potentially distribute out to yourself? Now, 00:01:18.060 --> 00:01:20.319 when it comes to reinvesting, and before I get 00:01:20.319 --> 00:01:22.780 into that, say hi to people, Tamiya. Hey, good 00:01:22.780 --> 00:01:25.290 people. Hey. So I'm going to ask you this question 00:01:25.290 --> 00:01:27.989 because this is a misnomer I get from a lot of 00:01:27.989 --> 00:01:30.909 folks, especially people who are new to business. 00:01:31.349 --> 00:01:33.730 When I say reinvest back into the business, what 00:01:33.730 --> 00:01:35.670 is something you maybe heard or thought? Like, 00:01:35.670 --> 00:01:38.329 what does that even mean? Reinvestment for me, 00:01:38.489 --> 00:01:41.950 based on my experience, means that if you make 00:01:41.950 --> 00:01:45.489 $10, you're going to put that $10 back in the 00:01:45.489 --> 00:01:48.569 business for, say, to buy product. I used to 00:01:48.569 --> 00:01:51.430 work as a waitress. And so when you think about 00:01:51.430 --> 00:01:54.109 profits, they would... reinvest in buy more food 00:01:54.109 --> 00:01:58.069 or buy more paper towels or something like that. 00:01:58.090 --> 00:02:00.310 Yeah. And so a lot of times people hear that 00:02:00.310 --> 00:02:01.409 they're like, Hey, I'm putting all the money 00:02:01.409 --> 00:02:03.250 back into the business. But it's like, okay, 00:02:03.310 --> 00:02:05.310 but where is that money going? So that's what 00:02:05.310 --> 00:02:07.989 we want to talk about today is how should you 00:02:07.989 --> 00:02:10.789 think about where to put the money and then what 00:02:10.789 --> 00:02:13.009 expensations should you have for what you should 00:02:13.009 --> 00:02:16.490 get back as a result? All right. Now I preface 00:02:16.490 --> 00:02:19.270 this because many times the business owner is 00:02:19.270 --> 00:02:21.699 the biggest asset. And they're also potentially 00:02:21.699 --> 00:02:24.400 the biggest liability of the business. How is 00:02:24.400 --> 00:02:26.340 the business owner liability? You might ask. 00:02:26.800 --> 00:02:30.120 Well, one is they use the business as their personal 00:02:30.120 --> 00:02:33.500 piggy bank. All right. So when they have profits, 00:02:33.840 --> 00:02:36.340 they don't reinvest anything back into the business. 00:02:36.379 --> 00:02:38.560 So you've maybe seen the business where it's 00:02:38.560 --> 00:02:41.659 a storefront and the storefront is beat up. It 00:02:41.659 --> 00:02:45.060 looks dilapidated. Or if you know that restaurant 00:02:45.060 --> 00:02:48.000 where it's not clean, they have old stuff that 00:02:48.000 --> 00:02:50.419 they're using. And so depending on the business 00:02:50.419 --> 00:02:53.259 you're in, that might speak directly to your 00:02:53.259 --> 00:02:55.819 brand. That might speak directly to the service 00:02:55.819 --> 00:02:58.699 you provide. And eventually it might impact your 00:02:58.699 --> 00:03:01.979 actual sales. So you have to think about reinvesting 00:03:01.979 --> 00:03:05.180 to keep up with stuff. But as the business owner, 00:03:05.560 --> 00:03:07.740 you want to flash all the money you're making 00:03:07.740 --> 00:03:10.419 potentially. And then you just buy everything, 00:03:10.419 --> 00:03:12.099 right? I'm, you know, I'm a business owner. I'm 00:03:12.099 --> 00:03:14.199 making a lot of money. And so I'm buying all 00:03:14.199 --> 00:03:17.159 this stuff. but I'm not putting money back into 00:03:17.159 --> 00:03:19.439 the business. I'm not reinvesting back into people. 00:03:19.800 --> 00:03:21.939 I'm not reinvesting back into equipment. I'm 00:03:21.939 --> 00:03:24.699 not reinvesting back into processes, software, 00:03:25.120 --> 00:03:27.020 things that could help me make more money in 00:03:27.020 --> 00:03:29.199 the future. And so when you think about reinvesting, 00:03:29.280 --> 00:03:31.780 we're thinking about what could you buy or what 00:03:31.780 --> 00:03:33.439 could you use money on that's ultimately gonna 00:03:33.439 --> 00:03:35.740 help you make more money. And as I said before, 00:03:36.159 --> 00:03:39.460 when you value a business, normally it's tied 00:03:39.460 --> 00:03:43.280 to the money that it makes. So if I spend money 00:03:43.280 --> 00:03:45.280 in the business, that means the business on paper 00:03:45.280 --> 00:03:47.900 makes less money, which means if practice is 00:03:47.900 --> 00:03:50.740 actually less valuable. So when I spend money, 00:03:50.900 --> 00:03:53.139 I need to make more money to make my business 00:03:53.139 --> 00:03:56.120 more valuable or I've just effectively made my 00:03:56.120 --> 00:03:58.500 business worth less. All right. So real quick, 00:03:58.500 --> 00:04:00.460 let me jump in there because that is so good, 00:04:00.539 --> 00:04:03.340 right? The owner can be a liability or an asset. 00:04:03.460 --> 00:04:06.919 And we talked before about you really need to 00:04:06.919 --> 00:04:09.819 have a degree of separation between yourselves 00:04:09.819 --> 00:04:12.659 and the business. Have a different checking account 00:04:12.659 --> 00:04:14.479 because this is real life, what he is talking 00:04:14.479 --> 00:04:17.800 about. I've done business owners taxes and they're 00:04:17.800 --> 00:04:20.019 using one bank account for their own personal 00:04:20.019 --> 00:04:22.160 gain because they're like, oh, this is the profit, 00:04:22.379 --> 00:04:25.959 but it's not. Do you have cash flow? Do you have 00:04:25.959 --> 00:04:28.819 things you need to pay? Like we really got to 00:04:28.819 --> 00:04:31.639 challenge the way our mindset about how we look 00:04:31.639 --> 00:04:35.540 at profits, how we look at our business model. 00:04:35.779 --> 00:04:39.079 And like you say, your brand, right? If I am 00:04:39.079 --> 00:04:41.759 going to a restaurant and it is not clean or 00:04:41.759 --> 00:04:44.500 things are janky or you don't go into some restaurants 00:04:44.500 --> 00:04:47.100 and never have any biscuits, then your brand 00:04:47.100 --> 00:04:49.860 is saying, I'm not going to come here. Yes, the 00:04:49.860 --> 00:04:52.199 owner is pulling up at a nice six -figure car 00:04:52.199 --> 00:04:55.449 or whatever. But that's all on you. It's not 00:04:55.449 --> 00:04:57.870 in your business. And ultimately, you're going 00:04:57.870 --> 00:04:59.870 to hurt yourself. And you're going to impact 00:04:59.870 --> 00:05:02.430 the longevity, right? Because just thinking you 00:05:02.430 --> 00:05:05.050 want to sell, like Terrence is saying, if I look 00:05:05.050 --> 00:05:07.629 on paper and you don't have any cash flow, you 00:05:07.629 --> 00:05:09.410 don't have anything, or you're robbing Peter 00:05:09.410 --> 00:05:12.230 to pay Paul, I don't want to touch it. So I think 00:05:12.230 --> 00:05:15.910 that whole business owner, this is a clarion 00:05:15.910 --> 00:05:19.790 call to business owners to really evaluate how 00:05:19.790 --> 00:05:21.889 your relationship with the money, with the business 00:05:21.889 --> 00:05:23.870 is money. and what you're using it for sure. 00:05:24.050 --> 00:05:25.490 So actually made me think about when you were 00:05:25.490 --> 00:05:28.009 talking about the whole separation. So imagine, 00:05:28.189 --> 00:05:30.029 and I've worked with a lot of couples over the 00:05:30.029 --> 00:05:33.189 years and oftentimes a big issue for couples 00:05:33.189 --> 00:05:35.790 is having a joint account. Now imagine you have 00:05:35.790 --> 00:05:38.250 a joint account that all your money goes into 00:05:38.250 --> 00:05:42.069 and you need to go buy something but then you 00:05:42.069 --> 00:05:44.050 look in the account and ain't no money in there. 00:05:44.269 --> 00:05:46.670 Cause you saw your partner use it on something. 00:05:46.920 --> 00:05:49.959 that y 'all didn't discuss beforehand. Now you 00:05:49.959 --> 00:05:51.839 get upset and you're like, I'm not doing this 00:05:51.839 --> 00:05:54.620 again. I'm gonna keep my money separate. You 00:05:54.620 --> 00:05:57.920 have that attitude, but it's like, in the business 00:05:57.920 --> 00:06:00.939 case, that could be you, except you're both parties. 00:06:01.209 --> 00:06:04.550 Right? Your business might need stuff that would 00:06:04.550 --> 00:06:07.610 help you in the long run, but if personally you're 00:06:07.610 --> 00:06:10.470 not aligned in your goals and objectives, as 00:06:10.470 --> 00:06:12.470 far as personal and business, and you don't have 00:06:12.470 --> 00:06:15.170 a distinct separation, then you might be using 00:06:15.170 --> 00:06:17.230 money personally that could be going into the 00:06:17.230 --> 00:06:19.889 business and that will create internal conflict 00:06:19.889 --> 00:06:22.730 versus just external with you and your partner. 00:06:23.170 --> 00:06:25.970 So when it comes to reinvesting, the first step 00:06:25.970 --> 00:06:27.709 I always talk to business owners about is what 00:06:27.709 --> 00:06:30.430 can we do to one, make the business run easier? 00:06:30.750 --> 00:06:33.050 All right. And so generally that is going to 00:06:33.050 --> 00:06:35.790 be investing in things like advertising. So I 00:06:35.790 --> 00:06:38.889 can get more customers. I can invest in people 00:06:38.889 --> 00:06:41.970 so that they're either better trained, they're 00:06:41.970 --> 00:06:44.209 better equipped to do the job, or I invest in 00:06:44.209 --> 00:06:48.110 someone new that can help me do more stuff. All 00:06:48.110 --> 00:06:50.350 right. I can invest in systems and processes. 00:06:50.430 --> 00:06:53.990 So if I'm more efficient with my time, then I 00:06:53.990 --> 00:06:56.819 can do more stuff and I can scale quicker. Or 00:06:56.819 --> 00:06:58.860 I can invest in things like equipment. So if 00:06:58.860 --> 00:07:00.779 I can buy something that can actually, I can 00:07:00.779 --> 00:07:03.819 use to make more money, then ultimately that 00:07:03.819 --> 00:07:06.819 will allow the business to grow faster. So those 00:07:06.819 --> 00:07:09.220 are things I could commonly reinvest in. And 00:07:09.220 --> 00:07:10.600 if you think about it, the difference between 00:07:10.600 --> 00:07:13.860 reinvesting cash versus debt is they're not the 00:07:13.860 --> 00:07:16.980 associated cost with the debt. All right. When 00:07:16.980 --> 00:07:19.019 you think about cost of capital. So we talked 00:07:19.019 --> 00:07:21.500 about before that's tied to your debt. So you 00:07:21.500 --> 00:07:24.180 remove that element. However, you still have. 00:07:24.329 --> 00:07:26.790 the opportunity cost of I could use this money 00:07:26.790 --> 00:07:29.329 on something else. Or I could just, you know, 00:07:29.449 --> 00:07:31.990 go and get my new whip as we talked about. All 00:07:31.990 --> 00:07:34.829 right. The list that you just gave, like advertising 00:07:34.829 --> 00:07:37.209 or marketing, those are all things that make 00:07:37.209 --> 00:07:39.389 sense. Because if you're saying I want to be 00:07:39.389 --> 00:07:41.730 in this business for the long haul, it's not 00:07:41.730 --> 00:07:44.550 complicated, good people. It's really not. And 00:07:44.550 --> 00:07:48.779 reinvest in things that make sense. for the business 00:07:48.779 --> 00:07:52.259 long term. And I'm sure we'll do a podcast on 00:07:52.259 --> 00:07:54.579 this, but if you're a business owner and you're 00:07:54.579 --> 00:07:57.000 trying to spend the money, then maybe you need 00:07:57.000 --> 00:08:00.259 to sit down and find out what type of salary 00:08:00.259 --> 00:08:02.959 you need, right? Find out what you're spending 00:08:02.959 --> 00:08:06.269 the money on. And again, different. show different 00:08:06.269 --> 00:08:09.670 podcasts, but certainly that may be a red flag 00:08:09.670 --> 00:08:11.389 for you to really sit down and see what type 00:08:11.389 --> 00:08:15.129 of resources you need as the employee versus 00:08:15.129 --> 00:08:18.370 the owner if you're dibblin' and dabblin'. But 00:08:18.370 --> 00:08:21.470 reinvest in things that make sense or the business 00:08:21.470 --> 00:08:24.430 for the long haul so you can get a good ROI for 00:08:24.430 --> 00:08:27.730 sure. Yeah, I'm glad you said that because oftentimes 00:08:27.730 --> 00:08:31.410 when we are thinking about the profit of the 00:08:31.410 --> 00:08:34.190 business, we have to factor in that remember 00:08:34.190 --> 00:08:36.789 when you own the business you have two jobs you 00:08:36.789 --> 00:08:40.230 have the owner job and you have the actual worker 00:08:40.230 --> 00:08:44.009 job so you need to be able to make enough as 00:08:44.009 --> 00:08:46.830 a worker from the business to pay for your bills 00:08:46.830 --> 00:08:49.909 and then the business owner profits should be 00:08:49.909 --> 00:08:52.549 extra so if you're underpaying yourself as a 00:08:52.549 --> 00:08:54.610 worker and you're thinking hell you know my business 00:08:54.610 --> 00:08:57.110 makes a hundred thousand dollars but if your 00:08:57.110 --> 00:09:00.210 quote -unquote salary is 30 ,000, well, then 00:09:00.210 --> 00:09:02.470 your business isn't really making 100 because 00:09:02.470 --> 00:09:05.389 you're underpaying yourself as the worker. So 00:09:05.389 --> 00:09:08.309 ideally your business, as far as the work you 00:09:08.309 --> 00:09:11.529 do needs to pay you a base amount. And then on 00:09:11.529 --> 00:09:14.070 top of that, that's your true profit. If you're 00:09:14.070 --> 00:09:16.529 not, if you have a distorted view of your profit, 00:09:16.590 --> 00:09:18.570 what happens when you go to an outside buyer, 00:09:19.009 --> 00:09:20.570 they're going to look at your financials and 00:09:20.570 --> 00:09:23.009 say, Hey, in a perfect world, when you buy a 00:09:23.009 --> 00:09:25.389 business, they could just plug someone else into 00:09:25.389 --> 00:09:27.629 your job and the business will continue to run 00:09:27.629 --> 00:09:30.330 as it had. So if you're underpaying yourself, 00:09:30.649 --> 00:09:32.549 then they're gonna say, hey, look, I couldn't 00:09:32.549 --> 00:09:34.970 replace you with your paying yourself on paper. 00:09:35.090 --> 00:09:38.429 So I have to distort your earnings to factor 00:09:38.429 --> 00:09:41.610 in the higher cost of your replacement. So that 00:09:41.610 --> 00:09:43.850 number one gives you an idea of, hey, what are 00:09:43.850 --> 00:09:46.110 my actual profits? Which means I have to be paying 00:09:46.110 --> 00:09:48.450 myself or at least on paper showing, cause we 00:09:48.450 --> 00:09:49.909 talked about, you know, you can kind of fill 00:09:49.909 --> 00:09:52.230 that number with the S corp. But, okay, what 00:09:52.230 --> 00:09:54.669 is my actual true profit? Which is after I paid 00:09:54.669 --> 00:09:58.450 myself a fair market wage for what I do as a 00:09:58.450 --> 00:10:01.009 worker. Then when we think about reinvestment, 00:10:01.330 --> 00:10:03.649 number one, we got to kind of define, and I'll 00:10:03.649 --> 00:10:06.370 get more into this on the retained side, but 00:10:06.370 --> 00:10:08.669 generally we have a rainy day fund, which is 00:10:08.669 --> 00:10:10.129 kind of how you think about how you run your 00:10:10.129 --> 00:10:11.889 personal life. So I'm gonna use that example 00:10:11.889 --> 00:10:14.009 because I think this will bring this point home. 00:10:14.250 --> 00:10:16.519 So, so you think about, okay, as a person, As 00:10:16.519 --> 00:10:18.200 an individual, what do people normally tell you 00:10:18.200 --> 00:10:20.059 that you need to keep in your rainy day fund? 00:10:20.120 --> 00:10:21.980 Like how much? What kind of rules of thumb? Three 00:10:21.980 --> 00:10:24.279 to six months worth of rainy day. Right. Yeah. 00:10:24.279 --> 00:10:25.899 So they tell you, hey, keep three to six months 00:10:25.899 --> 00:10:28.259 as a rainy day fund. Well, in your business, 00:10:28.820 --> 00:10:31.179 ideally, if it has operations, you want to keep 00:10:31.179 --> 00:10:33.480 at least two months of your operating expenses. 00:10:33.799 --> 00:10:37.980 All right. So if I have X, Y, Z amount of labor 00:10:37.980 --> 00:10:40.340 costs, of insurance, all that, I want to keep 00:10:40.340 --> 00:10:43.700 at least two months because ideally, you know, 00:10:43.700 --> 00:10:44.960 when you keep three to six months, because you 00:10:44.960 --> 00:10:47.879 might get laid off, personally and so you want 00:10:47.879 --> 00:10:49.820 to be able to bridge the gap to be able to find 00:10:49.820 --> 00:10:51.940 another job or whatever right well if your business 00:10:51.940 --> 00:10:54.059 isn't making money for three months you probably 00:10:54.059 --> 00:10:57.299 got a broken model okay so you say hey I at least 00:10:57.299 --> 00:11:00.019 need two months but then also as an individual 00:11:00.019 --> 00:11:03.279 I might also factor in stuff that might break 00:11:03.279 --> 00:11:07.019 that I need to replace so hey you know what if 00:11:07.019 --> 00:11:09.940 I know that my refrigerator goes out every five 00:11:09.940 --> 00:11:12.220 years hypothetically and a refrigerator costs 00:11:12.220 --> 00:11:13.940 five thousand dollars well hey I want to set 00:11:13.940 --> 00:11:16.370 aside a thousand dollars a year to factor in 00:11:16.370 --> 00:11:18.110 that, hey, in five years, I'm going to have to 00:11:18.110 --> 00:11:20.269 replace this. So instead of me dipping into my 00:11:20.269 --> 00:11:23.669 cash, well, now I have money set aside to pay 00:11:23.669 --> 00:11:25.950 for my replacement. All right. And then I also 00:11:25.950 --> 00:11:28.669 say, could say, hey, what if I want to go reinvest 00:11:28.669 --> 00:11:31.269 in something? You know, I want to go buy my new 00:11:31.269 --> 00:11:33.590 TV or whatever. Hey, I could set aside money 00:11:33.590 --> 00:11:36.269 for that. And in the same concept with your business, 00:11:36.330 --> 00:11:39.149 if you want to reinvest into something bigger, 00:11:39.549 --> 00:11:41.850 then you might set aside that money to have it 00:11:41.820 --> 00:11:44.580 to the side. So that way, whenever you do go 00:11:44.580 --> 00:11:46.659 buy it, you're not tapping into your rainy day 00:11:46.659 --> 00:11:49.759 fund. Do you know how a person go buy a new hold? 00:11:49.980 --> 00:11:51.759 It's like they tell you, listen, we need to have 00:11:51.759 --> 00:11:55.139 money saved up. It's something to happen. You 00:11:55.139 --> 00:11:57.419 also need to have money to change these filters, 00:11:57.639 --> 00:12:00.320 to get the yard mode, like maintenance and just 00:12:00.320 --> 00:12:02.419 different things. And then you need to have money 00:12:02.419 --> 00:12:05.899 to reinvest and the upkeep of the whole. And 00:12:05.899 --> 00:12:09.919 so simply put, you guys, whatever you do in your 00:12:09.919 --> 00:12:12.059 own personal life and your whole, how you think 00:12:12.059 --> 00:12:14.360 about your whole, you need to think that same 00:12:14.360 --> 00:12:16.259 way with your business. You still need a rainy 00:12:16.259 --> 00:12:18.159 day fund. You're still going to need a replacement. 00:12:18.379 --> 00:12:20.059 You're still going to need maintenance funding. 00:12:20.419 --> 00:12:23.539 So all this profit that you're getting. is not 00:12:23.539 --> 00:12:26.320 to blow. Reinvestment is going to be our word 00:12:26.320 --> 00:12:29.200 for the week. Let's reinvest and identify where 00:12:29.200 --> 00:12:31.259 we need to reinvest because I'll tell you right 00:12:31.259 --> 00:12:33.559 now, he mentioned that rainy fine. Listen, depending 00:12:33.559 --> 00:12:35.580 on the type of business that you're in, you may 00:12:35.580 --> 00:12:38.379 not make a profit right away. Those bills still 00:12:38.379 --> 00:12:40.379 have to get paid. For sure. So when you think 00:12:40.379 --> 00:12:44.419 about as an individual and if you decide to take 00:12:44.419 --> 00:12:47.120 on an expense. So let's say, say, for example, 00:12:47.340 --> 00:12:51.100 I go buy a car and now my car payment is a thousand 00:12:51.100 --> 00:12:52.259 dollars a month, five hundred dollars a month, 00:12:52.340 --> 00:12:55.320 whatever. If I'm still keeping my same three 00:12:55.320 --> 00:12:58.039 or six months of expenses, that means my rent 00:12:58.039 --> 00:13:00.100 a fund would actually need to be higher to factor 00:13:00.100 --> 00:13:02.840 in the additional cost that I just took on the 00:13:02.840 --> 00:13:05.159 same concept in your business. If you reinvest 00:13:05.159 --> 00:13:07.600 back into your business, and this is a tax podcast. 00:13:07.840 --> 00:13:10.320 So the positive from that vantage point is if 00:13:10.320 --> 00:13:12.460 I reinvest back into my business, my profits 00:13:12.460 --> 00:13:15.539 are lower, meaning I save on taxes today. Well, 00:13:15.639 --> 00:13:16.759 obviously with the idea of trying to make more 00:13:16.759 --> 00:13:19.799 money in the future, but also if I can make more 00:13:19.799 --> 00:13:23.000 money in the future. then it should make my business 00:13:23.000 --> 00:13:25.740 more valuable overall. So if I can grow my profits 00:13:25.740 --> 00:13:28.919 from A to B, the value of my business at B should 00:13:28.919 --> 00:13:31.139 be higher than it was at A. But the good thing 00:13:31.139 --> 00:13:32.980 is, just in the same way when you own a house, 00:13:33.100 --> 00:13:35.360 if your house goes up in value, you don't pay 00:13:35.360 --> 00:13:37.759 tax on that increase in value until you decide 00:13:37.759 --> 00:13:41.480 to sell it. Well, in your business, when I reinvest 00:13:41.480 --> 00:13:44.159 my money and my profits are lower, I actually 00:13:44.159 --> 00:13:47.519 have saved ordinary income taxes. So that's based 00:13:47.519 --> 00:13:51.289 on my tax bracket. So if I'm in a 24, 32, 35 00:13:51.289 --> 00:13:54.169 % tax bracket. If I reinvest a dollar back into 00:13:54.169 --> 00:13:56.850 my business, then I'm going to save 35 cents, 00:13:57.090 --> 00:14:00.250 24 cents, 32 cents of taxes. The reason I bring 00:14:00.250 --> 00:14:02.389 that up is because let's say I reinvest that 00:14:02.389 --> 00:14:04.350 back to the business and now the business is 00:14:04.350 --> 00:14:06.850 worth more in the future. Well, if I decide to 00:14:06.850 --> 00:14:09.450 sell the business in the future, that increase 00:14:09.450 --> 00:14:12.169 in value, I will actually pay capital gains tax 00:14:12.169 --> 00:14:15.090 on, which capped out at 20 % for a business owner. 00:14:15.409 --> 00:14:18.419 So instead of me paying ordinary income at 32, 00:14:18.600 --> 00:14:22.379 35, 37, I'll reinvest, lower my profit, save 00:14:22.379 --> 00:14:24.899 the taxes, and then hopefully increase the value 00:14:24.899 --> 00:14:26.879 of the business where I'll eventually only pay 00:14:26.879 --> 00:14:29.659 20 % when I decide to sell. I won't actually 00:14:29.659 --> 00:14:33.100 pay it until I decide. So the incentive from 00:14:33.100 --> 00:14:35.559 the tax standpoint is you're incentivized to 00:14:35.559 --> 00:14:37.759 reinvest back into the business just based on 00:14:37.759 --> 00:14:40.120 that dynamic. That's good. That's a good strategy, 00:14:40.399 --> 00:14:42.379 y 'all. Y 'all listening? How to lower your tax 00:14:42.379 --> 00:14:44.960 bill right on the money. So once again, this 00:14:44.960 --> 00:14:48.879 isn't tax advice, of course, but going back to 00:14:48.879 --> 00:14:52.659 the illustration, when you have that three to 00:14:52.659 --> 00:14:55.740 six month rainy day fund and you take on an expense, 00:14:56.159 --> 00:14:58.500 your rainy day fund goes higher or should go 00:14:58.500 --> 00:15:00.080 higher to compensate for the higher expense. 00:15:00.320 --> 00:15:02.799 in the same concept with your business that difference 00:15:02.799 --> 00:15:06.379 so let's say my thousand dollar car means my 00:15:06.379 --> 00:15:08.679 rainy day fund needs to go up by three months 00:15:08.679 --> 00:15:12.159 so three thousand dollars all right that money 00:15:12.159 --> 00:15:14.740 in my business my rainy day fund that would be 00:15:14.740 --> 00:15:17.440 called my invested capital meaning that's the 00:15:17.440 --> 00:15:20.779 money that stays in the business it's money that 00:15:20.779 --> 00:15:24.320 the business has to operate all right that's 00:15:24.320 --> 00:15:27.340 my invested capital if my rainy day fund goes 00:15:27.340 --> 00:15:30.539 up meaning hey I need if I took on a thousand 00:15:30.539 --> 00:15:33.059 dollar expense, my rainy day fund need to go 00:15:33.059 --> 00:15:35.480 up by two months or two thousand dollars. So 00:15:35.480 --> 00:15:38.299 I have to now think, OK, if my rainy day fund 00:15:38.299 --> 00:15:40.820 has to go up by two thousand dollars, that means 00:15:40.820 --> 00:15:45.080 the profit I need to get as a result of me reinvesting 00:15:45.080 --> 00:15:47.940 should be at least 50 percent of that or in this 00:15:47.940 --> 00:15:50.539 case, a thousand dollars. So that would be what 00:15:50.539 --> 00:15:53.539 you would call your return on invested capital. 00:15:53.639 --> 00:15:56.980 So my invested capital is a thousand. I reinvest. 00:15:57.120 --> 00:15:59.179 And now my invested capital needs to be $2 ,000 00:15:59.179 --> 00:16:00.899 because my rate of their fund is higher. I need 00:16:00.899 --> 00:16:03.279 to be able to make that $1 ,000 back. And Julie, 00:16:03.279 --> 00:16:06.620 I want to do that within 12 to 24 months. If 00:16:06.620 --> 00:16:08.840 I can't do that, then this is probably not a 00:16:08.840 --> 00:16:11.320 good investment for me. All right. And this also 00:16:11.320 --> 00:16:14.559 goes back into if I keep too much money in the 00:16:14.559 --> 00:16:16.460 business, meaning I have a lot of cash that's 00:16:16.460 --> 00:16:18.559 not doing anything, that's actually going to 00:16:18.559 --> 00:16:20.960 lower my return on invested capital. All right. 00:16:21.059 --> 00:16:22.899 For you real estate people, it's the same concept. 00:16:23.259 --> 00:16:25.299 If you have a house that has a lot of equity 00:16:25.299 --> 00:16:27.769 in it, but you make very little money in rent, 00:16:28.250 --> 00:16:30.350 you have to reassess, hey, should I sell this 00:16:30.350 --> 00:16:32.769 house, get the equity out and reinvest it somewhere 00:16:32.769 --> 00:16:34.929 else? That'll get me more rent. All right. So 00:16:34.929 --> 00:16:36.669 it's the same concept. It's just a different 00:16:36.669 --> 00:16:38.990 avenue. So this is why, you know, your personal 00:16:38.990 --> 00:16:41.169 life, your business life intersect as far as 00:16:41.169 --> 00:16:43.389 how you think about things. We just want to help 00:16:43.389 --> 00:16:45.710 you simplify the concept. So you can probably 00:16:45.710 --> 00:16:48.090 just make better decisions that are not only 00:16:48.090 --> 00:16:50.379 maybe tax efficient, but also help you. grow 00:16:50.379 --> 00:16:52.919 the business. So make common sense investments 00:16:52.919 --> 00:16:56.299 people okay into people systems and processes 00:16:56.299 --> 00:16:59.519 marketing things that will get you profit okay 00:16:59.519 --> 00:17:03.240 not your car okay. So ideally if you continue 00:17:03.240 --> 00:17:06.119 to reinvest back into the business that's basically 00:17:06.119 --> 00:17:09.559 your own piggy bank right I get money in I reinvest 00:17:09.559 --> 00:17:13.039 it back it's just more money back out right so 00:17:13.039 --> 00:17:15.880 it's similar to if you let's say you had a vending 00:17:15.880 --> 00:17:18.180 machine right if you could put a dollar in and 00:17:18.180 --> 00:17:21.460 then add a two dollars that spits out you would 00:17:21.460 --> 00:17:24.680 do it all day all right and so normally that's 00:17:24.680 --> 00:17:27.240 why most businesses are constrained by how much 00:17:27.240 --> 00:17:29.859 cash they have if they have a really good opportunity 00:17:29.859 --> 00:17:32.099 right it's like hey i need to be reinvesting 00:17:32.099 --> 00:17:34.460 as fast as possible because i can put a dollar 00:17:34.460 --> 00:17:36.400 in and get two or three dollars back i want to 00:17:36.400 --> 00:17:38.319 keep doing that as much as i can but if i put 00:17:38.319 --> 00:17:40.039 a dollar and i'm getting 50 cents back i need 00:17:40.039 --> 00:17:42.480 to pump the brakes that's not a good that's not 00:17:42.480 --> 00:17:45.259 a good use of the money that i'm putting back 00:17:45.259 --> 00:17:47.579 all right So you need to be able to identify 00:17:47.579 --> 00:17:49.319 this. All right. And you know, one of the clients 00:17:49.319 --> 00:17:51.500 we're working with now where, you know, we're 00:17:51.500 --> 00:17:53.759 thinking about, okay, how much is this business 00:17:53.759 --> 00:17:55.900 actually making? And what are the numbers they 00:17:55.900 --> 00:17:57.799 need to be paying attention to, to identify? 00:17:57.880 --> 00:18:00.319 Hey, are things in, are they changing? Are the 00:18:00.319 --> 00:18:02.380 dynamics changing? Like I was making a lot of 00:18:02.380 --> 00:18:03.660 money, but now all of a sudden I'm not making 00:18:03.660 --> 00:18:05.859 it much. What's happening? Things could be tied 00:18:05.859 --> 00:18:08.720 up. Like what's tied up with. Remember, go back 00:18:08.720 --> 00:18:11.700 and listen to our last podcast about debt, about 00:18:11.700 --> 00:18:14.900 is this cash flow tied up? Like, why is things 00:18:14.900 --> 00:18:17.359 changing? Why is things shifting? Where is my 00:18:17.359 --> 00:18:21.039 profit going? Where is the profit going? Yeah, 00:18:21.279 --> 00:18:23.000 those are all good questions for sure. So cool. 00:18:23.160 --> 00:18:25.339 So just to summarize, we kind of want to think 00:18:25.339 --> 00:18:27.000 about when we think about reinvesting, we need 00:18:27.000 --> 00:18:29.079 to define where am I going to put the money? 00:18:29.299 --> 00:18:32.000 So that could be in the people, systems, processes, 00:18:32.240 --> 00:18:35.930 equipment, advertising. I needed to define decide 00:18:35.930 --> 00:18:38.430 what is the minimum return I want to get because 00:18:38.430 --> 00:18:41.470 if I use debt, I have an extra cost associated 00:18:41.470 --> 00:18:44.690 with it. If I use my own cash, I have the opportunity 00:18:44.690 --> 00:18:46.750 cost of where that money could go otherwise. 00:18:47.150 --> 00:18:49.450 So I have to assume I need to have a certain 00:18:49.450 --> 00:18:51.670 rate of return as a result, which we talked about 00:18:51.670 --> 00:18:54.990 at least a 50 % return on invested capital. And 00:18:54.990 --> 00:18:57.609 then I can prioritize where I do it and have 00:18:57.609 --> 00:19:00.950 the process to just continue to reassess so that 00:19:00.950 --> 00:19:03.349 I can determine, hey, my returns are going down. 00:19:03.470 --> 00:19:06.869 I need to maybe pivot my strategy or figure out 00:19:06.869 --> 00:19:09.250 what's happening so that I can continue to get 00:19:09.250 --> 00:19:11.670 that higher investment. So my business will continue 00:19:11.670 --> 00:19:14.430 to grow and scale as I get bigger. So any parting 00:19:14.430 --> 00:19:17.690 thoughts for the people? No, just I say no. I 00:19:17.690 --> 00:19:20.250 would just say certainly I think this is a good 00:19:20.250 --> 00:19:23.109 opportunity for any business person to just sometimes 00:19:23.109 --> 00:19:26.450 take time, sit down once a month, make even quarterly 00:19:26.450 --> 00:19:28.990 to just evaluate your finances and see where 00:19:28.990 --> 00:19:31.930 you're at, because you don't want to be. caught 00:19:31.930 --> 00:19:34.609 in a pickle or it's a rainy day and you don't 00:19:34.609 --> 00:19:38.170 have it or it's time to invest or reinvest or 00:19:38.170 --> 00:19:40.490 upgrade your systems and you don't have it. And 00:19:40.490 --> 00:19:42.910 so this is a really good call to action to make 00:19:42.910 --> 00:19:45.890 sure that you know your money, know where your 00:19:45.890 --> 00:19:48.910 money is going and understand the ROI with it 00:19:48.910 --> 00:19:52.029 for sure. Definitely. So cool. So hopefully you 00:19:52.029 --> 00:19:54.289 took some nuggets away. You have some strategies 00:19:54.289 --> 00:19:56.250 as far as reinvesting back into the business 00:19:56.250 --> 00:19:58.470 that can lower your tax bill, but ultimately 00:19:58.730 --> 00:20:01.549 you want to be measuring the long -term impact 00:20:01.549 --> 00:20:03.890 of that on the business. So keep more of what 00:20:03.890 --> 00:20:06.470 you earn and we will talk to you again next week 00:20:06.470 --> 00:20:08.789 about how much you should think about retaining 00:20:08.789 --> 00:20:09.650 in the business.