You’ve taken the risks, are wearing many hats, and have put in the sweat equity. As an owner, it’s time to see the fruits of your labor AND your investment. While there are many benefits and opportunities as a business owner, owner compensation is definitely a top priority. Profit distributions are one-way owners reap the reward.
What is a Profit Distribution?
Profit distribution refers to the process of allocating the profits earned by a company to its various stakeholders, such as shareholders, employees, and management. There are different methods of profit distribution, and the choice of method depends on various factors such as the company's financial position, its goals and objectives, and the preferences of its stakeholders.
Profit Distributions for Small Business Owners
As the name suggests, a profit distribution alludes to a business having profit, which is income that exceeds the business’s expenses and tax liability. Being a business owner myself, I don’t like to leave profit distribution to chance or wait and see if there is money “left over” to take out of the business.
Profit Allocation Before not After
I recommend business owners allocate their income as it’s received, essentially set a budget, and include Profit Distribution as a line item. In addition to allocating profit distributions, you need to allocate money to cover all operating expenses, taxes, and owner’s compensation, such as salary or wages, in order to keep your business thriving.
Not Enough Income for Profit
But, what if there is nothing left over for a profit distribution? You need to look closely at operating expenses. Are there areas where you can reduce expenses or decrease spending? Some places to start are renegotiating contracts, evaluating subscriptions, or even scaling back some nonessential (but fun to have) items.
Don’t Do it Alone
A trusted advisor or your CPA can help you evaluate and make recommendations on which expenses are essential and beneficial to your business. Cutting your financial services provider or even your marketing engine could be detrimental to the future of your business, so it is imperative to understand the implications of eliminating necessary expenses.
A Cause for Celebration
Profit distributions are what make all the long days and sacrifices as a business owner worth it. Proactive planning and goal setting make profit distributions not only possible, but a cause for celebration! Moreover, having that money allocated ahead of time makes profit distributions easy.
DBA Can Help
As a firm dedicated to helping businesses maximize their potential, we are here to assist you in defining financial goals, evaluating expenses, and answering any questions you may have about various profit strategies. Before recommending any strategy, we will evaluate its application to you and your unique situation.
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