Profit is the Reward for Risking your Time and Money
Do you get the Rewards you really Deserve?
I am all too often dealing with business owners who say their accountant told them something like:
“Don’t make too much profit – you will have to pay more tax”
“Keep your profit to a minimum – in fact, ideally try making losses”
“Great – we can use this loss to offset xxxx….”
How many times have you been advised by your Accountant to reduce your profit?
Are you REALLY worth less?
Consider your profit as the reward for the time you spend, and risk you take, in your own business.
When you contemplate what you are receiving – in the same way that Wages are paid to employees and Interest is the return for the risk of putting your money in a bank – ask yourself “Am I getting what I really deserve?”. And if the answer is “NO” then stop worrying about what goes to the tax man and start putting yourself first.
It is the job of accountants to legally “re-categorise”, shuffle and construct things to minimise your tax (that is why you pay them). Unfortunately, this often makes it difficult for you to really see what you are getting back for all your risk and effort, or to understand what you actually deserve for your effort and risk. When you take away the tax-minimising-magic are you really getting a good deal? – is the deal good enough to justify you continuing, or would you be better off if you sold up?
Want to find out..?
As an SME Business Owner you undertake 4 kinds of activities for your business and you deserve to be paid fairly for each of these:
- Worker – doing stuff; serving customers and clients etc
- Manager – co-ordinating stuff; making sure things run to plan and the timing and quality of goods and services are up to scratch
- Director – deciding stuff; creating the plan, look and feel of the business including business strategy, and future directions
- Owner – investing stuff; providing the backing, guarantees, and money to start (and often grow) the business
Rewards for taking Business Risks – How to calculate what you deserve
Step 1 – What do you Do?
It might be hard to actually work out exactly how much time you spend wearing each of the above hats daily, or during a single week. BUT if you look back on the last year, overall, you can most likely work out a rough average that splits up how you spend your time…
Step 2 – What are you worth?
Take these rough averages and for the time split from Step 1 and establish what you would pay someone else to do each of these three roles for you. Don’t forget to include overtime, sick leave, holiday pay and all the other benefits that your staff get (the things you most likely never take). The calculation should show less for worker wages than manager wages, and a bit more for executive wages – added together this will constitute a fair salary for your overall time.
NOTE: We not saying you should get a job elsewhere, but if you were sick what would the three part-time people needed to fulfill each role reasonably expect?
Step 3 – What is at Stake?
Consider how much money you have invested in you business, loans at start-up, money to buy stock & equipment, profits reinvested, being a guarantor etc etc Add up all of these to get a total and then work out a reasonable annual interest payment for making this investment. If you are not sure what “reasonable” is, use your current annual credit card rate as a guide and multiply that by the amount you have invested into your business.
NOTE: If you have borrowed money FROM the business, as well as investing money into the business, then offset any loans TO you against any loans BY you to get to a net total before calculating the interest.
Step 4 – What do you Deserve?
What you deserve is a combination of rewards for the time you spend and the risks you take. Total up your answers from Step 2 and Step 3 to get a reasonable approximation of what you deserve – you can always add extra if you think you are extra special!
i.e. you are adding the amount you are due in salary, to the amount of reasonable interest you are due, to work out what is a fair return for what you contribute in both money and time.
Step 5 – Are you getting Enough?
Find out what you take by:
a) adding up what you receive from your pre-tax business profit each year in drawings, perks, superannuation, salary etc….You don’t have to show anyone but yourself so be extra honest and include all those Officeworks purchases you took home “accidentally” and any “business lunches” you might have had – don’t under-estimate the rewards you really take by leaving this out.
b) Add the total from a) to you post tax profit to find the total Rewards you are receiving right now for taking Business Risks! (Your Post Tax Profit is the number at the very bottom of your Year End Profit and Loss Report).
NOTE: Yes, it is a little hard to be a value on the happiness your business and customers bring and some of the extra benefits of being an owner, but on the flip side many employees have rewarding, happy jobs too.
REMEMBER: Not all of the profit has to end up as cash in your back pocket… Re-investing in your business is also a form of taking profit because it increases the value of the asset you own and you can receive more in the end when it comes time for you to sell (there is extra risk in this strategy)
Are you paying yourself what you deserve, or are you missing out just so you can dupe the taxman? Maximise your profit, get your tax accountant to worry about the compliance and admin, and make sure you reward yourself as well as possible – just like Gina Rinehart, or Rupert Murdoch or any other really successful business owner you can think of.
As YOU are doing the work, and taking the business risk, ONLY you can make sure you are paid fairly for all of it!