For the fifth part of our Challenge Accepted series, we will be talking about how to know if your business is profitable and how to determine how much to pay yourself as the business owner.
Challenge
A business needs to be profitable in order to be sustainable. In addition, business owners need to pay themselves in some manner. But knowing if there is a profit and when and how much to pay yourself can be challenging.
Solutions
- Determine if your business made a profit or a loss for the period
- Research owner pay rules for your type of business
- Make sure that you have funds set aside for taxes
- Seek out advisory services
Determine if your business made a profit or a loss for the period
You may have heard the terms “net profit” and “net loss”. But what do these mean?
If you take your gross income for the period and deduct (or minus) all expenses for the period and come up with a positive amount, then you have a “net profit” for the period.
An example of a net profit:
But if you take your gross income for the period and deduct (or minus) all the expenses for the period and come up with a negative amount, then you have a “net loss” for the period.
An example of a net loss:
Knowing if your business has a profit or a loss is a very important first step.
Research owner pay rules for your type of business
Is your business operating as a sole proprietorship, a partnership, a C-corporation or an S-corporation? The type of business entity can affect how you may need to pay yourself.
Some areas to research are: Should you take payments as draws, distributions or consider them as loans that you owe the business? What is the potential impact of these payments on your business and personal income taxes? Does the type of entity of the business mean that you need or can take a salary?
Make sure that you have funds set aside for taxes
It is vital that you set aside funds for taxes. Again, it depends on your entity type as to how you will be paying in for your taxes. For instance, as a sole proprietor, you more than likely will be paying quarterly estimated tax payments. But as an owner of an S-Corporation, you may be paying taxes through a combination of both salary deductions and quarterly estimated tax payments. Some entities file and pay their own taxes as well.
Seek out advisory services
Do you use some type of accounting software to run your business? If so, your accountant and bookkeeper can help you to understand the story your numbers are telling you.
Understanding your numbers can help you to know if the business is profitable and can help you to determine if you have paid yourself too little or too much. We love sharing this type of analysis with our clients. Oftentimes, business owners are surprised when they see in black and white where they stand.
We always recommend for our clients to meet with their tax professional at a minimum before year-end if not more often throughout the year. No one wants surprises when it comes to how much tax is owed. By meeting before the current year is over, there even could be steps taken that can minimize the amount of taxes owed.
Some time back, I shared how following the Profit First method helped me. Read my blog from 2015 here.
Knowledge is power. Once you know if your business is profitable and when and how to pay yourself you will have conquered this challenge and feel confident in moving forward.