What Should I Do With This Year’s Profit?

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Congratulations! You worked hard all year long and you’re closing in on a nice chunk of change. That’s right, you’re set to earn a profit. But after your well-earned victory dance, you’ll have to decide what to do with it.

Do you put it back into the company by increasing your working capital? What about setting it aside for future use? Maybe now’s the time to get a commercial vehicle, or bump up a few must-have items that slid down the list over time.

Let’s explore five options to best manage small business income:

1. Retain Profits as Cash

When your business books a profit, that profit is reflected as “retained earnings” under owner’s equity on your balance sheet. (Owner’s equity is the book value — or net worth — of your business.) A higher owner’s equity looks good to any lender because it indicates financial strength and shows you know how to use what you have (assets) to get what you want (equity). So, if you’re considering pursuing financing either now or later, you’ll want to keep some of that profit in the business. Retain a sizable portion as actual cash to really rev up your balance sheet.

2. Purchase Equipment

With the changes in the tax law, you can fully expense any equipment you purchase in the year you buy it — at least until 2023. So if you have equipment on your “need to buy” list and it makes financial sense, you can use some of your profits to purchase that equipment outright or to put a down payment on it and finance the rest. This is a very useful strategy if you plan on realizing a large profit this year, as it will reduce your taxes on that profit. Keeping a low debt-to-equity ratio burnishes your balance sheet.

3. Hire or Outsource

Are you still trying to do everything yourself? Stop! You know you can drink out of a 36-ounce mug faster than you could out of a similarly sized bottle because of the bottleneck, right? The same concept applies to you and your company. If everything flows through you, it creates a bottleneck that constricts growth. So breathe deeply and let go. Hire people to do the things you don’t like or aren’t part of your expertise. If the tasks aren’t core, consider outsourcing them. This will free up your time so you can work on your business — and not just in it.

Carpenter smiles at balance sheet after learning he turned a profit

4. Market Your Company

Who are your customers and where are they? How do you get to them? The answers to these questions tell you where you need to direct your marketing dollars, and there are many options available. Just make sure you track whatever alternative you use to ensure you’re getting some bang for your hard-earned bucks. When people call, ask them how they heard about you. Provide codes in ads or for referral partners so you know where your customers found your business. Keep trying tactics until you find the marketing option that really drives your sales.

5. Celebrate Your Achievement

Did you reach a milestone? If so, take a distribution and celebrate! You did well! So often we reach our goals but fail to take the time to acknowledge the achievement itself. Do that often enough and you end up feeling dissatisfied and burnt out. So it’s worth celebrating. Take that trip or upgrade that car.

Remember, you earned that profit. Using those funds for working capital, purchasing assets or marketing are all appropriate means to manage small business income and grow your company. But remember to reflect on your wins, too. Your business is working for you, rather than you working for your business.

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