Written by: Tuesday P. Brooks, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
For many small business owners, profitability feels elusive. It feels far away, unachievable, even confusing. In fact, it’s not unusual to overhear a business owner say I feel like we’re breaking even or I feel like we’re profitable. But this isn’t a situation that is based on how we feel. No, this is a time when we should actually know factually that our business is indeed profitable.
Let’s start by defining true profitability, so we understand exactly what it is.
Then let’s discuss how we can reach it in three power moves. Here we go…
What is Profitability?
If your business has sales, you’re making money. But to be profitable is a whole other story. This requires your company’s sales to exceed:
operating expenses
personal living expenses (e.g., salaries of all the owners)
taxes (both business and personal)
health insurance premiums
savings and retirement funding
If you have even $1 left after covering all of the above (and your current business assets exceed the current liabilities on your balance sheet), congratulations, you’re profitable!
So how do we get to the point where we have $1 left over?! Keep reading to find out.
Move No.1 Establish Accurate, Organized, and Timely Bookkeeping
From the very beginning of your business journey, you should strive to maintain what we like to call Pretty Financials©. This means that your books should be:
accurate
organized
timely
Why? You’ll want your books to be accurate so they provide a true picture of the financial health of your business. You’ll want them organized so you have financial data available to make informed decisions in a timely manner so you can better manage cash flow. And you’ll want them timely so you can create accurate reporting and take advantage of tax strategies and planning.
Bookkeeping of this caliber will also make it much easier to discover fraud and catch any unnecessary spending that is sucking the profit right out of your business.
Move No.2 Implement a Profit First Cash Management System
Next on the agenda is Profit First. What is that, you wonder? In essence, Profit First is a behavior-based cash management system that teaches business owners to prioritize profit. Designed and popularized by Mike Michalowicz, the method makes saving money more fun than spending it! But, most importantly, when implemented properly, Profit First not only guarantees that your company will be profitable, it ensures that you’ll be compensated fairly and that you’ll always have the money you need to pay your taxes.
Its mission is to empower entrepreneurs like you by providing a simple cashflow blueprint that brings clarity and control over your business finances.
A basic setup of the Profit First system can look like this (depending on your bank):
First, set up three bank accounts with your current bank:
1st checking account = income
2nd checking account = owner’s compensation
3rd checking account = operating expenses
Next, set up two new accounts with a different bank:
1st savings account = profit
2nd savings account = taxes
You then allocate money in the income account to all the other accounts sequentially– PROFIT account, OWNER’S COMP account, TAX account, and finally OPEX account.
The purpose of these two savings accounts is to remove the temptation of “borrowing” from them. Then the funds are there when you need them (for example, to pay your taxes).
Don’t wait to start using the Profit First system! The best time to implement it is in the early stages of your business journey. More so than just a cash management method, it’s an important mindset to establish from the start.
Now, look at that – in only two steps, you’re already seeing a profit! Now, let’s discuss the last move…
Move No.3 Put Smart Tax Strategies in Place
Small business owners don’t always place an emphasis on tax planning. But they should – you should. Why? First, let’s talk about the difference between tax preparation and tax planning.
Tax preparation simply refers to the act of making sure you’re compliant with all federal and state tax laws. In other words, you file proper tax returns. Tax planning, on the other hand, involves taking steps to actively maximize your tax savings within the parameters of the law.
Truthfully, the only real way to reduce your tax liability as your business revenue grows is to implement tax strategies. The good news is that you don’t have to wait until your business is making millions; in fact, you can begin applying tax strategies (with the help of a tax professional) with a modest net income of $70k or greater.
Well, there you have it! Three strategic financial moves to put your business on the path to profitability. If you have questions or want to learn more about how to apply Pretty Financials ©, the Profit First © methodology, or tax planning to your business, please don’t hesitate to reach out to AJOY today.
Tuesday P. Brooks, Executive Contributor Brainz Magazine
Tuesday P. Brooks, MBA is a business owner, educator, trusted tax & accounting advisor, and fierce champion of small business. Unwaveringly devoted to financial fluency Tuesday’s mission is to accelerate the profitability of financially-sound, women-led companies that employ across the U.S. As such, she works tirelessly helping women founders gain the confidence to take a leap of faith towards growth so they can tap further into their joy of business ownership more easily.
