Three things that happen with Profit

Profit

  • Reinvest – It gets reinvested in the business. That is the paradox in business, the more money it makes the more it reinvest. This is because the owners want to expand the business.
  • Repay – One of the things that business will do with Profit is to use it to repay the liabilities. Mainly it would be the current liabilities like payable and sometimes would include long-term liabilities.
  • Dividend – The owners and investors would take a part of Profit in form of Dividend.
  • In a previous chapter we have learnt that, When money goes out, it either becomes and Expense or creates an Asset.
  • We also know that, There are two kinds of Assets,
    • Performing Assets (PAs)
    • Non-performing Assets (NPAs)
  • It is suggested to use profit made by the business to spend on expenses if required. If a business needs a more comfortable and healthy working environment for the employees. If it decides to spend money on buying better chairs, latest gadgets, decorative items, better kitchen area; it is advisable to use the money from the profit of the business. The spending should not be from borrowings.
  • The borrowing (Liabilities) is the money business has borrowed from insiders and outsiders .It is suggested to use that money mainly on Performing assets than on non-performing assets.

I would suggest you to get in touch with your mentors, consultant or accountant or some advisors you may have in your business or use you common sense to ask this question.

Question:  The decision that I will make how will it impact the Bottom-Line of my organization?

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