Creating passive income using your business profits

At Financial Edge Group, we work with a lot of clients who are also business owners, and a common story we hear from them is; “I’m working hard, paying lots of tax and making good money - but it all just ends up back in my business”.

To make sure your profits are working hard for you and not just disappearing back into the business - we need to have a plan. There are a few approaches - one is saving on tax - but here we’ll focus on using those profits to create passive income. Here are our top 4 tips:

Set a goal

The first step is to have a goal to work towards - maybe you want to buy an investment property, a commercial property related to the business or some shares - something that will tick along, look after itself and provide a regular income stream. Deciding on your goals is the first step.

Create a plan

Next, you’ll need a plan for how much money you need to put aside to reach your goal. A great idea is to automate this process, decide how much money you can afford to put aside and how often and start doing it. How this works and where that money goes are all things we can help you decide. One thing I suggest is to make sure you don’t hold too much capital in your business that isn’t really serving any purpose. By getting the business working more efficiently you can create both good cash flow, and good investment opportunities.

Use debt in your favour

Debt isn’t always bad, and in many cases, business debt is tax deductible. Instead of owning $100,000 in vehicles with no debt, perhaps you could take that $100,000 and put it towards a passive income-generating investment. Of course there’s an element of risk in decisions like these but there are some things we can do to mitigate the risk. And don’t forget, having diversification in your business also reduces your risk down the track, so it’s worth considering.

Diversify your business assets

Making investments and building wealth separate to the business will also help you reach your passive income goals. Maybe your assets are related to the business - for example, owning a commercial building that your business rents back - but making sure they are separate is key so that wealth is protected regardless of how well the business performs.

So what are the key takeaways? Have a goal and a plan to achieve it, commit to that plan and in 5 or 10 years you’ll be happy you’ve put that plan in place. Reach out to us anytime if you would like to discuss creating passive income in your business.