More Reasons for Profitability than You May Think

Posted on March 31, 2009 by David Gass 1 Comment

The number of small business owners who say their companies turned a profit in 2008 was 49%, according to a recent article published in Fortune Small Business. So this got me thinking, why only 49%.

Some entrepreneurs say they make sure the company doesn’t make a profit for tax purposes, or they take all the money as income and perks and never leave a profit, or some other scheme they’ve developed in order to lower profitability.

Of course entrepreneurs are going to do what they can to lower their tax liability, yet expensing everything just to lower profitability defeats the purpose of making a profit. A very successful entrepreneur once told me, “It’s not what you make it’s what you save”. So why spend all the profit just to save on taxes.

More importantly, a company losing money or breaking even every year is going to have a very difficult time finding financing. Lenders would rather work with companies making a profit for obvious reasons. It’s the same scenario when you don’t pay yourself very little wages from the business and then try to get a mortgage or other financing personally. Yes, you may have saved some in taxes, but you have also hurt your ability to get the financing you need.

When looking at a business you need to view the business as a shareholder from four different perspectives. The first is tax liability, the second asset protection/legal, third financing needs and fourth profitability of the business/financials.

Spend at least two solid days once a year to review your company’s strategic plan and take time to review these areas; tax, legal, financing and profit. Having a clear understanding how these areas need to work together will help the growth of your business. The problem most entrepreneurs have is they feel very comfortable with one advisor they have; their CPA or Lawyer and rely solely on what that person says. The problem is that that professional typically only views their clients business from their professional perspective, tax or legal and not at the other key areas.

So when building your team be sure you have individuals looking at all perspectives and keep in mind the advantages of showing a profit may outweigh the disadvantages of paying more in taxes.