Things to Do With Your Small Business Profits

Many small business owners go through difficult times in the early stages when they wonder if their small business will ever see profits. The ultimate goal of any small business owner when you start up your business is for that business to take off and become profitable to the point you know your business will be sustainable for the long term. If your small business is now turning a profit—congratulations. That’s a terrific milestone for your company and your hard work is finally paying off!

Of course, the nature of business tapaksuci.id means it’s never time to rest on your laurels. Once your business is making money, the next business decision to make is to how to use those profits. If you’re in those early stages, it’s not just about paying yourself more to buy something fun; it’s about setting your company up for future growth and long-term success.

What You Need to Know About Small Business Profits

Before we jump into how to use profits, we should take a minute to clarify what profits are and how to measure them. Experts recommend all small business owners learn to compile and use a profit and loss statement (P&L). When in doubt on any of your P&L figures, it’s best to err on the conservative side so you don’t overcommit yourself to plans or projects that your company cannot afford.

P&L statements serve multiple purposes. First, they provide you with a clear snapshot of the current financial viability of your business. Second, they allow you to set budgets and project your future business earnings. Finally, your P&L can help you determine your gross profit margin. In basic terms, your gross profit margin is how profitable your company is. It’s the amount of money you have leftover after you’ve paid all your bills and taxes.

1. Save for a Rainy Day

One of the first things you should consider when you start to see a profit is your savings. Do you have an adequate rainy-day fund to cover your working capital needs in case of an emergency expense or an unexpected revenue slowdown?

Take a look at what it costs to run your business over the course of a month. Then take a look at your bank account. If you started to see a serious slowdown in revenues or a large expense, how long could you keep the lights on? How long could you keep paying your employees and vendors?

2. Use Business Profits to Grow Your Business

Before using profits to undertake business growth or expansion, it’s important to run all the numbers and check with your advisors. At this point, it would be useful to revisit your business plan. You want to project whether or not reinvesting your current profits and undertaking more costs will pay off in the long run. Expansion plans should only begin once you’ve determined that your company could handle the extra operating costs.

3. Pay Down or Refinance Debt

It’s possible you’ve incurred some debt in order to start up your business. If this was your first venture, you may have had to borrow at a relatively high-interest rate, so you may want to consider refinancing and/or using some of your profits toward paying down debt.

You have two main options here: you can make large payments toward the principal balance of your debt, or you can look for refinancing. If your loan has a high-interest rate, you may want to take your updated financials to lenders to talk about refinancing. Once you can show that your business is profitable, you may be able to refinance at lower rates because you’re at a lower risk of default.

4. Use Business Profits to Pay Yourself

Finally, another way to use your business profits is to pay yourself, the business owner. The use of business profits for owner salaries can be a little bit complicated, depending on the legal structure of your operation. Here a few basics to consider.

If your company is a sole proprietorship or another pass-through entity, all of your profit flows straight to you as income anyway. If you’re running a C Corp, you can pay yourself a salary. If you start to see profits, you always have the option to pay yourself and/or your employees more. Remember that you don’t want to compromise your future growth opportunities, so raises should be reasonable. And if you’re involved in a partnership or a business with multiple owners, you’ll all need to agree (or get a majority vote, typically) as to what to do about profits and pay.

5. All of the Above

Of course, you don’t have to make all-or-nothing decisions about what to do with your cash once your company reaches the black. You may choose to leave some cash in the company to increase its value, pay a dividend, and also give your employees raises. You could buy a new piece of equipment and increase your own salary. It’s up to you and your goals for running your business. Being in the black just means you have a lot more choices and opportunities!

No matter what you think might make sense when it comes to using your profits, you should always consult a tax professional. Remember that if you’re running a pass-through entity, you’ll have to pay tax on your profits at your personal rate. And if you’re running a C Corp, your business will have to pay tax on those profits. Talk to your tax advisor about your business goals and financial situation; they’ll be able to help you calculate your net effective tax rate (after applying all the possible deductions, deferments, workarounds, and brackets) and work out a plan that maximizes both your tax efficiency and your objectives.

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