Trying to determine what to do with your businesses profits that are sitting in the bank account can be confusing for the successful nurse practitioner entrepreneur. Do you increase your business salary? Do you pay yourself a bonus? Do you invest it back into the business? Or do you just let it sit there?
The new business owner will sometimes freeze with what to do with the money. Other business owners can be careless and spend it all. Then there are those in the middle. Typically, those in the middle are the more seasoned business owners while the others are the new entrepreneurs. It is very important that you understand how to manage your practices revenue appropriately, so you can maximize your businesses success and also increase your personal wealth.
Remember, the money in the business is the businesses until you pay yourself that money. Your business is its own legal entity (if you did things right and formed an LLC), therefore, you need to manage the money responsibly. Your businesses bank account is not your personal piggy bank! If you treat it as such, then you will be in some potential trouble if you were ever audited by the IRS.
Regardless, you have 2 options with your business income:
- Pay yourself from the business.
- Reinvest the money back into your business.
That is pretty much it folks. In terms of paying yourself, check out the article HERE on how to do that correctly.
So, you must answer a very critical question when it comes to your business finances:
This can be very anxiety producing. Hell, it still is for me and I own multiple businesses! The answer to the question is: it depends on your personal circumstances. I am going to list common circumstances and my opinion of what you should do with your business profits.
REMINDER #2: Strive to always have 3-6 months of business expenses in your account at all time. The businesses that don’t have these kinds of reserves will be forced to close or go into debt during economic down turns, like what is happening secondary to COVID. The businesses that have cash reserves can weather the storms. It is the same as having a personal emergency fund.
REMINDER #3: You should always strive to be maxing out your tax advantaged retirement accounts. These are your 401ks and IRAs. If you are self-employed, then you need to max out your Self-Employed 401k or IRA. This will reduce your tax obligations while bringing you closer to financial independence.
- Business is a part-time practice, and you are living off your full-time employment: In this case, your side hustle is basically “extra money.” You do not necessarily need it because your expenses are covered through your full-time job. In this circumstance, it comes down to if you want to grow your business so you can eventually cut down to part-time employment or leave employment all together. If you want to grow the business, then use every single dime you can to REINVEST back into your business and grow it. If you are satisfied with where you are at, then pay yourself the money and pay off your house, invest it into stocks, etc.
- Business is a part-time practice, and you are employed part-time: This is essentially the same as above. If your personal expenses exceed what your part-time employment can cover though, then you have no choice but to dip into your part-time practices revenue to sustain your living expenses. Whatever is left over after you pay yourself, is all you will have to invest in your business. This could be problematic if you want to grow your practice. You will have to get a hold of your personal expenses so you can use your business money to grow your practice (remember, getting a hold of your personal expenses is a foundational pillar to a financial independence strategy). In this general circumstance, I would advise paying yourself the bare minimum you need to live, as you see fit, and invest the rest into your business if you want to leave your part-time employment.
- You have a brand-new business and are not working: This is a difficult situation for the nurse practitioner entrepreneur and a common one due to market saturation and the inability to find work. The decision on what to do with your business income really depends on your personal financial situation. If you are broke and need income, then you need to lower your expenses and pay yourself from the business to meet those personal expenses. This could be a large chunk of your businesses profit which would slow your businesses growth. Strive to invest as much of the money as you can back into your business for growth first, while maintaining an appropriate standard of living . You need to grow your business so you can produce a six-figure income on your own… this requires capital investment into your business.
- You have a full-time business: Ahh, the goal of entrepreneurism; to have a full-time business that completely sustains your livelihood. This is an impressive accomplishment for any nurse practitioner entrepreneur in my opinion. So, what do you do with all those juicy business profits? First of all, pay yourself a reasonable salary that you can live off. Once that is done, what do you do? If your goal is to build an empire or a multi-million-dollar practice, then you need to invest as much money as you can back into the practice. If you are satisfied, then pay yourself as much as you can out of that business and maintain enough in the account to cover your overhead. If you were smart, you would reinvest all that money you paid yourself into other income producing assets so you can become financially independent!
- You have multiple part-time businesses and a part-time job (Elite NP Model): This is my favorite and my personal circumstance. If you follow The Elite NP Model, then you should be living below your means, therefore you can sustain your livelihood off part-time employment. Because of this, your 2-3 part-time businesses are going to build your wealth. Now, what do you do with all your profits? You should invest them into your businesses until you reach a point where each one is producing at least $100,000 a year in profit. At this point, it will be hard to grow the practices further in a part-time fashion but that is okay, you are being financially redundant and you have multiple income streams. This is when you begin paying yourself the rest of the profits so you can reinvest them into other assets to bring you closer to financial independence. This is literally what I am doing.
These are the most common circumstances that a nurse practitioner will be in in terms of entrepreneurism. What you do with profits from your business comes down to:
- Do you want to scale and grow your practice? If so, invest as much money back into your business.
- Do you need your business income to pay for your personal life? If so, then pay yourself the minimum amount required to live off while investing everything else back into your business.
- Do you want to heavily invest your money so you can reach financial independence faster? Then invest into your business to a point where the income is satisfactory to meet your living requirements and pay yourself the rest so you can invest them into other asset classes that will assist you in becoming financially independent.
You should always strive to grow your business. Never become content. Always be progressing. But, there is a ceiling for many nurse practitioner entrepreneurs. Once you hit that ceiling in your business and you are maxed out on time to spend on them, then you need to pay yourself the rest of the profits and aggressively invest your money so you can reach financial independence quickly, if that is a goal of yours.
Back to the 2nd paragraph of this article, you should always be somewhere in the middle in terms of how you use your business profits. You should pay yourself a reasonable salary that provides for a comfortable lifestyle while investing the rest of the money back into your business until you reach a point where you are generating profits in the $300,000-$600,000 range, depending on your personal preference. But hey, if you want to invest heavily into your business so you generate over a million dollars a year, then go for it! It is ultimately up to you, but it is my opinion that you should be somewhere in the middle for long term financial security.