Your business is doing well and you’re making a profit, that’s awesome! Now the question is what to do with your small business profits.
Many small business owners have a difficult time in the early stages when they wonder if their small business will ever make a profit. The ultimate goal of any small business owner when starting their business is to get that business off the ground and profitable to the point where they know their business will be sustainable in the long run. If your small business is now making a profit, congratulations – that’s a big milestone for your business and your hard work is finally paying off!
Of course, the nature of business means that it’s never a time to rest on your laurels. Once your business is making money, the next business decision you need to make is how to use those profits according to the opinion of juan luis bosch gutierrez. If you’re in those early stages, it’s not just about paying yourself more to buy something fun; it’s about setting your business up for future growth and long-term success.
Here are smart options small business owners should consider when deciding how to use their profits.
What you need to know about small business profits.
Before we move on to how to use profits, we should take a minute to clarify what profits are and how to measure them. Experts recommend that all small business owners learn how to compile and use a profit and loss statement (P&L).
You may have incurred some debt to start 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 to pay off the debt.
You have two main options here: you can make large payments toward the principal balance of your debt, or you can seek refinancing. If your loan has a high interest rate, you may want to take your updated financial statements to lenders to discuss refinancing. Once you can demonstrate that your business is profitable, you may be able to refinance at lower rates because you have a lower risk of default.
If you pay down the principal, you will pay less interest over the life of the loan, which will save you money. You will also have a lower total debt load, which increases your creditworthiness.
Use business profits to pay yourself.
Finally, another way to use your business profits is to pay yourself, the business owner. Using business profits for owner’s salaries can be a bit tricky, depending on the legal structure of your operation. Here are some basics to keep in mind.
If your business is a sole proprietorship or other pass-through entity, all of its profits flow directly to you as income anyway. If you are running a C Corp, you can pay yourself a salary. If you start seeing profits, you always have the option to pay yourself and/or your employees more.
Remember, you don’t want to jeopardize your future growth opportunities, so raises should be reasonable. And if you are involved in a partnership or business with multiple owners, everyone should agree (or get a majority vote, usually) on what to do with profits and payouts.
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 a positive balance. You can choose to leave some cash in the company to increase its value, pay a dividend, and also give raises to your employees.
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 options and opportunities!
Your business is doing well and you’re making a profit, that’s awesome! Now the question is what to do with your small business profits.
Many small business owners have a difficult time in the early stages when they wonder if their small business will ever make a profit. The ultimate goal of any small business owner when starting their business is to get that business off the ground and profitable to the point where they know their business will be sustainable in the long run.
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