You founded your company. Against all odds, you have been successful and after two years you’re still functioning, and even making profits. Your business has gained scale that allows you to collect a dividend. It’s not a dividend with a large D, but rather a tiny dividend. Nevertheless, after two years of functioning on a slave wage the pile of cash in your account which you started with is all gone, there’s a hole as if a bomb exploded. Considering how modestly you have been living for the last two years, it would be a sin to improve your life greatly. Especially that your partner is expecting a second child, and you would be happy to stop renting a flat, and change this clunker you’re driving into a nice car. The fact that your wife is more and more insistently mentioning the first vacation since the inception of the company doesn’t help either.
On the other hand, without further income, the cash in your account is enough for one month of functioning without further inflow which is not a comfortable situation. It would be good to hire additional people because the amount of work is not decreasing, and you would willingly – rather than dealing with everything – start dealing with almost everything. Of course, you can do it without extra people. The revenue forecast for the upcoming months doesn’t look bad either. However, you realize that it will be difficult for you to keep up the growth rate without additional employees; simple company-growth “fuels” end easily. If you have been working for 12 hours a day for two years, you can theoretically increase the workload to 15 hours a day and add working Saturdays – but you probably won’t be able to keep up that pace for longer than a quarter, and you will make worse decisions while overworked. Exploiting employees is also a dead end, especially in a situation where unemployment rate is zero.
When I talk with the founders whom I have known a bit longer, the dilemma “further growth vs. paying dividends” appears quite often. Startups are obviously free from this type of thinking. In a startup, the polar star is venture capital-driven growth, not profit and dividends. So I thought I would write down what I usually say in such situations.
Prevention
- Talk to your wife
- Put down the cash
- Don’t have debts
Think about it: how much cash do you need to have in order for it to really make a big difference in your life?
Let’s say that at the initial stage this difference is a house, a new car purchased with cash, and 150,000 PLN per year for maintaining your family. So you need about 900,000 PLN (if you live in Wroclaw). If you would like to pay out this dividend during the year, we are talking about 92,500 PLN a month before tax. In practice, therefore, to make the difference in a year and not wanting to pay out a dividend of more than 20% of profit, it means that you must have a profit of 5.5 million zlotys per year. And that’s only if you are the sole shareholder. Most will never reach this level, so it doesn’t seem real in the first three to five years. In practice, therefore, your goal will not be making a big difference in a year, but paying for all the things that will make you happy and productive enough to allow further growth of your company. Only thanks to this growth will you gradually get to the point that makes a difference in your life.
So if we have a company in which you get 100% of shares and want to get 900,000 PLN from dividends, how much do you have to pay out net every month to get 900,000 PLN?
- 1 year – 75,000/month
- 2 years – 46,000/month
- 3 years – 25,000/month
- 4 years – 18,750/month
- 5 years – 15,000/month
Of course, the probability that your two-year business will record 60 months in a row, in which you can withdraw 15,000 PLN, is quite small. However, there is even less chance that your business will exist if you pay 75,000 PLN in a row for 12 months. So what should you do with the money in order to persevere in the process of growing the company?
New lifestyle?
First, define what has to happen for you to increase effectiveness. Paying yourself a 100 PLN higher salary in order to pay for a house cleaner which will allow you not to worry about cleaning up your apartment or office, makes a lot of sense and it’s worth doing it as soon as possible. This will allow you to focus on the right things. If you live in an apartment where something is constantly going wrong, and during the last quarter you didn’t get to the meeting twice because your car broke down – it would probably be a good idea to change the flat and the car. If possible (because, for example, you don’t have a child), sell a car and go everywhere with Uber, iTaxi or Taxify – it will be much cheaper. If you move to a different flat, rent instead of buying. Remember that buying a car and a flat requires a lot of time for maintenance and repairs. And you have no time because you’re growing your business.
Current financial condition
If you have already taken care of the issues that stopped you from being more effective, take a look at your finances. If you have any debt on credit cards or other high-interest liabilities – pay them off. By paying off your debts, you will achieve a guaranteed ROI of a dozen or so per cent which is a phenomenal result. Once you pay off your debts, top up the cash in your account, so that you have a financial cushion that will allow you to survive six months without a cash inflow to your account. Without debts and without fear of not paying the rent regardless of the situation, you will be able to make better decisions and lower the stress level.
Once you’re more effective, determine what needs to happen to make you happier. Research says that people who are not happy make worse employees. I believe the same is true for the founders. The key issue, however, is that objects do not give happiness, it’s the experiences. Hence, instead of buying a watch and a new suit, go on vacation and buy yourself 50 bottles of wine to drink with your fiance every Saturday. Moreover, experiences are cheaper than things.
However, if you feel that you must, consume things as well. Get a tattoo, buy yourself a watch, buy yourself a suit at Miler’s. There is a chance that buying something for your supportive partner is a good idea. Make sure, however, that you don’t buy more than you need. The tip from me is that buying larger quantities of smaller things leads to more happiness. For example, a Ford Mustang, which costs 200,000 PLN, is worth over 650 dinners for 300 PLN each. There is a big chance that eating an amazing dinner in a new place, twice a week for 6 years in a row will give you more joy than a new car.
What’s important is that you can keep from depriving your business of cash through well-incurred private debt. The major share of cash in the above example is consumed by purchasing a house. The instalment of a 30-year mortgage for 600,000 PLN is 2,700 PLN, with an interest rate of 3.5%. Even if Wibor 3M jumped up to 7%, the instalment would increase to less than 4,000 PLN.
If in the above exercise you come to the conclusion that you must have a house, financing it with a loan which you will be systematically overpaying over a dozen years, is probably a better scenario from the point of view of multiplying assets than depriving your business of 600,000 PLN to buy the house with cash. This way, you can have a house almost immediately (if you have a profitable business of over 2 years and pay your salary, you have built a credit rating). What is extremely important is NOT to build a house, but to buy one which is ready for you to move in. I know that it is so much more expensive – I’ve already seen the founders who are building a house and a company at the same time which is why neither of those two things going well. Of course, in my opinion, it is much better not to want to buy a home and a fast car, but for some reason, few people share my opinion on this subject.
Whatever you decide, paying out a dividend starting from small amounts of 1,000 PLN for each profitable month will probably allow you to start the above process without the risk of exposing the company’s finances to large turbulence.
It is certainly a good practice to pay yourself a dividend for each profitable month, counting profit as an income in your account, not issued invoices. Over time, this 1,000 PLN can turn into larger amounts. Just remember to pay out dividends on a scale that doesn’t expose your business to slowing down the growth.
