Winning the investment game

It's 1975. Ralph and Jim both open stores at opposite ends of the same town. Both start with the same capital, equipment and number of employees. During the next three decades, Ralph and Jim both make improvements, hire ASE-certified counterpeople and expand their businesses. At their 30th anniversary business parties, Ralph and Jim share the same problems. Both agree they work harder than they should. Both agree they should be further ahead financially.

Here's where they part ways. While both owners look forward to retiring in 10 years, Jim has a plan to leverage a relatively untapped portion of his business to send his net worth skyrocketing. Ralph simply hopes things will get better.

Shoot forward 10 years. Ralph and Jim are on the verge of retirement. Jim talks about moving to his new house on the coast. Ralph hopes he'll be able to afford health care. Jim plans to see Europe. Ralph hopes his car will last another five years. Jim sells his business to the highest bidder, taking a cool extra $250,000 into retirement. Ralph's store attracts little interest from buyers. He worries that he may simply have to shut down or sell his business in pieces.

Obviously, Jim put one heck of a plan in place in 2005. What did he do? He talked to a financial advisor and wised up about his investments and his future.

"It's really important to find an advisor who can work with you on a comprehensive, holistic basis, advising you on profitability, insurance issues, investment issues, employee benefit issues," says Vince Clanton, certified financial planner with the Chancellor Group in Atlanta. "They can be a great resource."

If, like Ralph, you're focusing mainly on the first, you're running half a business. You're cutting your net worth in half, slashing the value of your business and frittering away revenue you could be using for retirement.

"Business investments are a risk though," you say. "Better to play it safe and feed your money back into your business or save it for tough times." That's the wrong attitude. Investments might be risky, but with the right knowledge and focus, you can enrich yourself, your store and your employees. Start with these five basic investment rules.

Rule 1: Adopt a new philosophy

Like a lot of business owners, you probably turn your finances over to an accounting firm or an accountant in your own office. You meet with an accountant at least once a month to discuss profit margins and other money matters. Odds are, since you're still in business, you hear relatively good news. Ironically, that might be the worst thing you could hear.

When the typical business mind discovers money is coming in, it relaxes. Focus is switched back to day-to-day issues like personnel problems, customer demands, training and battling over hourly rates.

The problem with placing so much of your focus here is that you'll always be dealing with these problems. Meanwhile, you're wasting precious time you should be spending on financial issues.

Think back to the operational problems you faced 10 years ago. You're probably still dealing with many of them today.

What if, during that same time, you had invested some of that energy exploring investment options, learning about financial markets and diversifying your portfolio? You'd have the same problems you do today, but you'd be a lot richer. Get the point?

The time to begin focusing on your finances is now. Start by adjusting your attitude toward your business. Get your mind on your money.

Your best strategy is first locating a certified financial planner with aftermarket industry experience. Next, you'll need to begin looking at your business in an entirely new way.

Jim Weil, a financial planner and partner with the Financial Strategy Network in Chicago, says to be objective. Look at your business as a potential business investment owned by someone else. Ask yourself, what would it take for you to put money in this investment?

Obviously, you'd want to see a return on your investment. You'd want to see a business with a healthy cash flow and healthy profits that continue to increase each year.

Begin looking at your business for what it is: an investment. Then, like any other investor, look for ways to diversify. Think of your profits as one more asset that should generate revenue. In fact, think of them as your hardest worker. The harder they work, the more you can relax.

Rule 2: Pump up your profits

Clanton has noticed an oddity that seems to afflict a number of businesses. "They operate as if profits didn't matter," he says. "They seem to be more focused on just getting by day to day, completing work, with little attention to where their money is going."

These initial profits are your business' lifeblood. Clanton says businesses shouldn't just look to generate profits. They need to maximize them.

When it comes to raising profits, Clanton explains that businesses have two options: create new revenue or cut expenses. Because the former works in with Rule 3, "invest in yourself," we'll leave it for later. As for expenses, Clanton says good owners watch every dollar that goes out for expenses. They don't, however, spend a lot of time worrying about miniscule issues, such as what type of copy paper is used.

"Owners watch every check going out the door," he explains. "I don't think they agonize over small purchases, but they question if they need to make the purchases at all and they know if the vendors are treating them properly."

Clanton notes that owners focus on larger expenses like salaries because they typically represent a business' biggest expense. In fact, you may have to let some employees go, particularly if they aren't providing a return on the investment you put into them. "Sometimes the difference between making a profit and not is one mediocre employee," says Clanton.

Handling this area can be particularly difficult in the aftermarket industry where the employee pool is said to be shrinking. Fire someone and you risk not being able to find a replacement. You also run the risk of alienating the rest of your staff, which could send them to other parts stores. This is where you and your employees need to understand the importance of profits. If you're not generating profits, you aren't running a successful business and probably won't be around for the long term. Profits are the business. Ultimately, with no profits, there are no jobs for anyone.

One more tip: be sure to pay yourself a reasonable, strict salary. Don't simply skim off your profits for a percentage. Your pay, like anyone else's, is part of your operating expenses, which must be taken into account when determining profits. Profits are for investment, not payment.

Rule 3: Invest in yourself

Clanton says profits should be broken into two distinct areas: reinvestment in your business and outside investments. He provides the following formula for divvying up the two: "Determine how much of your profits are a fair return on your investment. (Use that money for outside investments.) What's left over should be reinvested in your business."

Clanton suggests spending reinvestment dollars first on replacements for necessary equipment that is worn out or damaged. Next, address any other necessary areas, such as building repairs. Remaining dollars should be directed to those areas that generate the most profits.

Reinvestment options should satisfy at least one of the following criteria:

• Generate new dollars.
• Save money.
• Improve your product so that you can attract more business or raise prices.

Looking back at the Ralph and Jim game, Ralph's store may have ended up being larger than Jim's, with more employees and newer technology. Jim still ended up better off financially because he put money into areas that generated money. He didn't buy equipment just to have it or upgrade if he didn't need to. He put money where he knew he would make money.

Rule 4: Go outside the store

A wide array of stocks, bonds, funds and more are available for your outside investments. Look, or have your financial advisor look, into all of them to find those that best meet your needs.

Regardless of where you put your money, heed this advice from Weil: Look to get as many pretax breaks as possible. Uncle Sam can take a big 20 percent or 30 percent chunk of your hard-won profits. This is particularly true for the retirement accounts you should set up for yourself and your employees (included here as an outside investment because money is being invested outside the store). Depending upon the size of your business, options such as Individual Retirement Accounts, 401(k) plans and Simple Employee Pensions (SEPs) offer a variety of tax breaks.

Your goal with outside investments should be the same as with profits generated at your store. Build as much revenue as possible (that you and your advisor find reasonable considering factors such as risk). Clanton explains that not only will this increase your net worth, it raises the value of your stores, making it more attractive to buyers.

Clanton explains that these funds represent part of the capital a buyer will use to pay off the note he or she spends for your business. The profits (initial and secondary) your business generates represent the return a buyer gets on an investment. Buyers look for parts stores with the best profits also because those stores are best fit to survive a change in ownership.

"Businesses are very fragile things," explains Clanton. "When a new owner comes in, morale can sink, employees can go elsewhere and the business can fall away. The goose may die before it ever lays the golden egg."

Referring again to the Ralph and Jim game, Jim's business was attractive to buyers because he maximized profits everywhere he could. In Ralph's case, he has a nice store, in some ways nicer than Jim's, and a respectable business. But he lacks the kind of profit flow that attracts business investors.

Rule 5: Get professional help and stick to it

Would you consider yourself a true financial expert — someone educated on all the financial factors that even lightly touch upon your business and finances? If not, you're not alone. You're actually like most business owners.

However, you'll want to separate yourself from many of them who are making the same critical mistake: refusing to get professional financial help. Financial information changes every day. The way business is conducted from one industry to the next changes regularly. Valuable, new ideas are constantly uncovered or created. The only way you're going to keep pace with these changes and innovations is by hiring a professional — a financial planner like Weil or Clanton.

A financial planner will help you determine where to put your money, what equipment to buy, what employees to keep and how to plan for your retirement. They can redefine and redirect all the many financial issues you've been handling — possibly quite poorly — by yourself.

Beyond specific financial help, Clanton explains that planners can offer new ideas to build your business. "Our job is to help keep people up-to-date. More than that, we offer new ideas to businesses, new ways they can operate," he says. "We can bring in ideas from other industries, ideas a business owner wouldn't normally ever come across."

Clanton also says you should expect real results from taking this advice — healthy increases in your revenue. How much? You'll have to hire a financial planner to find out.

To maximize their help, go one step further and maximize your own financial IQ. If you haven't already, sign up for business and finance courses offered through your local colleges or program groups. Read at least one business book a month and ask your managers to do the same. Put together a small library at your store.

This education, like the one your planner received, is one of your best investments. It will pay off regularly and show up in your profits for years to come.