Running a successful business means keeping an eye on the cash that’s coming into your business. But it also means keeping a close eye on what’s going out. This is the essence of harmonious cash flow. When businesses are cognizant of both their ongoing revenues and their operational expenditure, they are well placed to manage their finances strategically.
That means not only understanding how to bring in money, but understanding payouts. However, this is a term that could be considered problematic. The word ‘payout’ has multiple meanings in the business world. Its connotations may be different depending on where you operate, how your company is set up, and the nature of your business.
With that in mind, let’s take a look at some of the most common payout definitions and some illustrative examples.
A payout is the expectation of a monetary disbursement for your business. In real terms, this usually takes two forms. It can mean a payment in return for a service rendered or a return on a monetary investment.
Let’s take a closer look.
Payouts for contractors
The nature of the workplace has changed a great deal since the digital revolution. Businesses rely not just on the labour of their employees, but of freelancers and casual contractors working in the gig economy.
Third party companies that offer payment services to businesses often provide payout solutions for paying these outsourced parties. Businesses can make payments all over the world in a choice of currencies into service provider’s bank accounts or e-wallets.
Payouts for shareholders and investors
The second, and perhaps most common, definition of a payout refers to the proportion of a publicly-traded company’s earnings that is paid to shareholders and investors. This is better known as a dividend payout.
Payouts can be expressed either in monetary terms or as a percentage of the investor’s initial contribution. They are usually expressed on a quarterly basis, but they can be expressed over any given time period, or an ‘overall payout’ can be calculated for the length of an investor’s relationship with your company. Payouts can be paid in either cash or stock dividends.
A payout may also refer to the period of time between making an investment and when the investor can start to recoup some of the profit. This is usually referred to as a ‘payout period’, ‘term to payout’ or ‘time to payout’.
Payout ratios explained
A payout ratio is the ratio between the amount that is paid out in dividends and your company’s net income within an established timeframe. This is a very important metric for investors and may influence their investment strategy.
The proportion of your income that is not paid out in dividends is called your retention ratio. When companies are able to sustain payout ratios or (better yet) steadily grow them, this is a good sign for investors. It means that they are able to manage their cash flow effectively and maintain consistent revenues.
Payouts in budgeting
Another example of where payouts may be used is in your company’s internal budgeting. A payout may refer to the amount of time it will take for a project to become profitable. Opening a second business premises, for instance, requires a lot of upfront expense, and businesses want to ascertain how long it will take to see a meaningful return on that investment.
This is calculated by dividing the sum of your upfront investment by projected cash in-flow within a set time period (e.g. a year).
We can help
If you’re interested in finding out more about the different kinds of payouts and how they affect your business, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.