This short-and-sweet post will shed some light on how little we knew in the beginning,
so no judgement, guys!
Both my partner and I are financially conservative. We pay off our credit card every month. We don’t spend more than we have. And we often put money in company savings and investments instead of in our own pockets. While those are all positive practices, we also feared low net profits because we thought it meant we weren’t doing well as a company. The larger the net profit, the more successful we perceived ourselves. Clearly, we did not quite understand what our financial information was communicating about our business. Four years later, we have drastically changed that mindset.
For those just beginning, net profit is what’s left of your revenue after all your expenses and before you take any distributions.
A large net profit obviously means you have more than enough revenue to cover your expenses. But it also means you’re going to pay a lot more in taxes! If as the business owner you take distributions instead of a salary, then you pay taxes on the net profit of the company, as opposed to what you take home every month. We did NOT know that up front! (I see you, super smart entrepreneur, shaking your head!)
Let me insert a disclaimer here that we are NOT tax professionals. We credit our accountant who has taught and continues to teach us so much. I’m simply sharing how that information has impacted our business practices. Each business type is different. It is important to work with a professional who can help you clearly understand what story your financials are telling.
This year’s tax season looks much different than last. That large net for which we had to give a nice chunk of change to the government? Decreased threefold. And not because we went out and impulsively spent all our profit. Do you hear me? Last year, we had THREE times the net we did this year, but our bank accounts are just fine. Four years into this small business ownership gig, and we finally feel like we’re wrapping our minds around how to do it wisely but also profitably. Our awesome CPA helped us figure out ways to spend down our net profit through legitimate business expenses, and we understand more now than we did in the beginning. A low net profit is the GOAL! (as long as you’re able to pay yourself).
Let’s hear from you! What have you learned about managing your company’s finances that has really made a difference?