What Do I Do With Capital Gains?

10 mins read

This article introduces questions to consider when deciding what to do with capital gains.

Congratulations, you have turned a profit from the sale of capital property! Capital gains are an exciting topic in finance, as this means the company has turned a profit from a sale. This profit means that the business now has decisions to make about what exactly can be done with that money. Before jumping right into that decision and buying nice new shiny things, it is valuable to consider the different options available for your business.

In our article “What are Capital Gains?” we explained what capital property is, what capital gains vs. capital losses are, reporting that is required for the gains and losses, as well as the tax implications. In this article, we will go over important questions to challenge yourself to answer when considering what can be done with capital gains.

Deciding What to Do with Capital Gains

When it comes down to it, this is your business. It is not our place to recommend what you do with your business’s profit, or how your business spends its money. What we can do however, is suggest questions that will get you thinking about your options. Providing these questions is how we can offer value to your decision-making process. Answering these questions when capital gains have been realized will hopefully get you thinking about the different areas of a business that can be taken into consideration when looking to expense or invest the profits.

Here are some great questions to answer when considering what to do with capital gains:

1. Who needs to be involved in this decision?

Are there shareholders or stakeholders that are involved in deciding what to do with business profits? Is this a partnership that has other owners that will need to consider these questions as well? While this may seem like an obvious question to ask, some people may get excited about having profits to decide what to do with, and forget that there are others that need to be involved in the decision-making process. Before letting your excitement get too far ahead of you, it may be a great idea to stop and consider who else needs to be answering these questions as well.

2. Is there other capital property the business requires?

Realizing capital gains means that capital property has been sold, and that a profit was made from the sale. So, looking at the capital asset that was sold, did this create a gap for another asset that is needed? For example, if a building was sold, this could mean a larger building is needed because the business is growing in size. Or perhaps a building is needed in another location because the business is expanding elsewhere. Some other common capital assets that could need to be replaced or purchased could include land, property, buildings, equipment, vehicles, and machinery. There are also intangible capital assets such as tenancy rights, patents, trademarks, and shares.

3. Are there building improvements that need to be done?

This is another great consideration for spending profits from capital gains. Take a walk around the building(s) that the business currently resides in or uses, and ask yourself what each building would ideally have to provide the best quality and use for the business. Is there anything in the building that needs replacing? What in the building could be renovated? Are there improvements that would make work more efficient or more effective? Is there anything that has been a priority to improve or fix? This doesn’t mean each improvement must be done. This could be used as a “wish list” which gives a good idea of what could ideally be done to benefit the running of the business. The list can then be sorted through to decide what makes most sense for the business to spend money on currently.

4. Would it be valuable to invest in my team?

Is growth something the company values or considers important? Do you see value in improving the employee’s skills? Having the opportunity to consider what to spend business profits on could mean the business can now afford training they have wanted to provide to their employees. Or perhaps you want to offer continuing education opportunities to employees, which will then also benefit the business. This profit could also mean the business can offer benefits to the employees such as health benefits. Does the business have a current benefits package? Is offering a benefits package something that has been considered or could be considered? Has the company culture been struggling or lacking? This could present an opportunity to invest in team-building activities or events that will bring the team closer together and reinforce a culture that has been missing. Maybe this means a bit more time can be spent on meeting with the team to communicate the culture that the business wants to foster and support. Presenting opportunities that offer value to the team contributes to a culture that will attract hard workers while increasing employee loyalty and decreasing employee turnover rates.

5. Does our marketing need to expand?

Has there been a marketing project on hold? Does the business want to expand into other markets? Are there any marketing campaigns that have been on hold until the business has adequate funds? Perhaps this profit now presents the opportunity to expand the business into another market, which will require a marketing project that has been on the business’s radar. This could be a great time to consider if the business has marketing strategies they can now spend money on in order to bring in even more business and create even more profits!

6. Does the business need more cashflow?

Is there enough cashflow in the business currently? Are monthly expenses being covered? Has the business expanded, yet there hasn’t been quite enough cashflow to cover an increase in expenses? Perhaps the business has expanded into another location that is being rented, which requires more cash flow for rent, utilities, and payroll for additional staffing. Profit from capital gains can offer the opportunity to make sure the cash flow of the business is adequate, which is pretty important to keep the lights on!

7. Is it time to invest?

Are there no physical assets required for the business? Have you answered “no” to all the above questions because you are wanting to invest money? Is it time to consider investing money so your profits can begin to make even more money for the business? Is the business in a place to invest? Do you understand investments are not a guarantee? How would the business invest their money? Where would the business invest their money? These are all great questions to answer when considering investing the business’s money.

The Possible Gains from Capital Gains

The above questions have presented ideas on many potential gains that could be experienced from using capital gains. These questions were designed to get you thinking about many different areas of your business that could benefit from profits including the purchase of more capital assets, building improvements, marketing, investments in the team, cash flow, or investment ventures. While we won’t recommend what to do with your profits, we will offer this challenge: Take 30 minutes after reading this article to answer the above questions and truly consider what would be best for the business to do with its capital gains.

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