Last week we talked about how to maximize your business cash flow using the five forces of cash flow. Let’s fast forward a bit and assume you’ve mastered all those things. Your cash flow is better than it has ever been. 

What do you do with all that cash?

New boat, car, new building, hire lots of new people? Nope. None of those ideas are bad, but to build wealth and safety in your business you must be disciplined in how you spend the cash you’ve created.

I want to give you a prioritized list on where to spend cash when it becomes available. The following list is in order, so be sure to follow it – in order.

1. Reserve For Taxes: There are income taxes due on every dollar of profit you make and payroll taxes due for every dollar you pay to employees. The amount you owe is debt to the government and the government has a slow, but very successful collections department!

Do not ever run your business assuming you will catch up later on your taxes. If you do not have to pay your taxes at this time, you must estimate your tax liability and put that amount away in a separate bank account until you pay the government. This money is not yours. It is not available to be spent on the business or on you.

2. Catch Up: After you have put cash away in a separate bank account for your tax liability, you can start to catch up on any financial holes you’ve dug. Has your accounts payable list gotten a little long? 

Catch up with your suppliers. Being a prompt payer is a great way to invest in your supplier relationships. Do you have any other informal “IOUs” outstanding? Promises to employees, etc.? Now is the time to make good on promises made.

3. Repay Debt: The borrower is the slave to the lender. Debt is not a tool that rich people use often because it gets in the way of building wealth. Debt increases your risk and keeps you from investing at the most opportune times. Get rid of it. Pay off lines of credit first then work through the rest of your debt.

4. Build Capital: How much capital should your business have? At least enough to take you through the deepest hole you have ever been in. How high has your line of credit gotten in the past? How high could it go? Start with that amount. If you are a newer business start with enough cash to cover at least two months of operating expenses.

In the end, how much capital you keep in your business is a personal decision. But great businesses hold a lot of cash because businesses with a lot of cash and very little debt are excellent wealth building tools.

5. Unplanned Bonuses: In step two, we covered making good on any promises you have made. If you had made any compensation-related promises to your people, whether in writing or not, you should have caught up on those promises in step two. 

If you have been diligent about not making promises, now is a good time to give an unexpected financial lift to the people who have made you successful.

I always suggest you pay performance bonuses rather than making big changes to salaries. Pay raises are forever, even in a downturn. Get your salary burden too high and you’ll be forced to lay people off when the next downturn comes. 

The benefits of a salary increase also fade when our lifestyles catch up with the new salary. Bonuses are way more fun because they can be spent on big needs or something fun.

6. Distributions: You should already be paying yourself a market-based wage and living off that wage after withholding for taxes. If you are not paying yourself and all the other owners a market-based wage you are clouding your financial picture, risking IRS trouble and probably underperforming.

Your business is not a real business unless it can pay the people who work in it a reasonable salary for the work they perform.

Once you have gotten through the first five priorities of your cash flow, you can now make distributions to owners. You have lived off what you earned, now you can enjoy the dividends created by what you own!

Spend your cash wisely and you will reduce risk while building wealth.