Posts

Profit Before Taxes: What it Means for Your Small Business

Now that you’ve started a small business, are you keeping up with the numbers that shed light on the profitability of your company? Not only do you need to evaluate cash flow, but it is also important to look at the reports that show the overall health of the company. Understanding the bigger picture is essential so that you can adjust your business strategy. That’s why you need to prioritize your understanding of profit before taxes.

It is exciting to work on product development and tasks that have a direct impact on business growth. On the other hand, it is common for business owners to feel like financial reporting and tax strategy is boring. But, it is essential to understand the importance of these tasks and how they will affect the future success of your company.

If you want long-term success for your business efforts, then you shouldn’t overlook the reports and numbers. Luckily, you don’t need to manage these details without support. Tap into the experience of an experienced accounting team to learn more about your options and the services that are available.

What is Profit Before Taxes?

What does it mean when your accountant is talking about profit before taxes? This term, sometimes referred to as Earnings Before Taxes (EBT), refers to the amount of money that is brought in by your company before paying for taxes and interest payments.

Even though this number doesn’t include tax burden and debt payoff, it does incorporate the overall business expenses that are used as write-offs. For example, there are many costs that are accrued throughout the year for overhead expenses, product development, marketing, and more. These costs are deducted from the money that is brought in. Then, taxes and reports are calculated based on the gross profit that is calculated.

The profit number can be found in your Profit and Loss statement. Or, you can talk to your accountant for a detailed explanation about how the number was calculated.

Why You Need This Information

Why is it necessary to know your earnings before taxes? Having a clear picture of the financial success of your company is essential so that you can make the right decisions that impact the growth of your company. Not only is your profit before taxes number needed for tax calculations, but these details might also be necessary when you are bringing on investors or applying for business credit.

Investment analysts will request specific information about the financial trends for the company. These details can help the analysts determine the operating performance of the business and possible financial trends going forward. If you can show the potential of your business, then it makes it easier to get the angel investing funds that might be needed to help your company grow.

This type of analysis is essential at specific points of your business progression. Often, the numbers are used to gain an objective analysis for the current trends and possible growth in the future. Additionally, your accountant will use these details when evaluating the tax burden that needs to be paid in a given year.

Applying for Business Credit

There are often times when business owners need credit to keep the company running. If you are applying for credit, then the lender will complete a credit risk analysis. The lender wants to ensure that your business will have the viability to pay back the loaned amount in the future.

Additionally, the financial health of your company might impact the interest rate that is offered for the loan. If the lender can see that your business is a good risk for the investment, then it is easier to get a low interest rate. But, if your company is already bursting at the seams with debt and financial obligations, then the lender will see the risk and probably increase the interest rate accordingly.

Financial institutions want to see that you can repay your obligations without harming your business or operating profits. When the cash flow is too tight, as shown in the financial reports, then it is a sign that the loans might default in the future.

Problems with Your Business Profits?

You might feel the pinch of cashflow as you are working through the month. But, it is hard to understand the full picture without looking at the financial reports. If you are dealing with low profit margins, then your business could be facing some serious consequences:

  • Growth is Limited: It is hard to encourage growth in your company if you don’t have the cashflow to keep things afloat. This poor cash position means that you are lacking in the money that is needed to reinvest into the company. If the profits are low and you don’t have the cash available, then how will you reinvest for inventory replacement and product development? These problems could be the nail in the coffin that prevents you from competing with other companies in the industry.
  • Economic Changes Will Have a Bigger Impact: The economy is always in flux, which means that every business owner should expect financial changes in the future. When the inevitable shock happens to the economic growth of the industry, poor profit margins will have a drastic impact on your company. Not only do you need to maximize your profits during the good months, but you also need to save for a rainy day with an emergency fund.
  • No Options for Business Financing: Financial reports that show poor profits for your company make it hard for you to get the loans or finances that might be needed. These reports can impact lending from banks and credit unions. At the same time, investors will be hesitant to provide the funds if they can see the potential for failure due to poor profit margins.

Just because you can see that your business is reporting low profit before taxes, doesn’t mean that your company is going to fail. Instead, it is a sign that you need to make a few changes. Also, don’t proceed without enlisting the assistance of an experienced accounting team to help with your financial management. It is essential that you tap into the expertise that is offered. Then, use this advice to put your company back on track for the future.

Tips for Boosting Profit Before Taxes

What should you do when you learn that your business has low profit before taxes? Here are a few things that should be evaluated to change the trajectory of your company:

  • Product Pricing: What does it cost to produce the products that are sold? How much profits are available for each unit? Not only do you need to evaluate the product pricing, but you should also look for ways to reduce the upfront costs for product development. You might not be charging enough, or it might be time to eliminate waste or reduce expenses. Look for options to source cheaper goods. Or, you might be able to cut payroll expenses by outsourcing some of the services that are needed instead of hiring more full-time employees.
  • Overhead Costs: Look at every cost that is coming through for overhead expenses. You have a set list of payments that need to be sent each month for anticipated costs. Sometimes, these expenses are higher than necessary and cutting into your profit margins. Consider options to cut unnecessary costs or reduce the amount that you are paying. For example, you might be able to move to an office location with lower rent payments. Or, call the phone and internet provider to see if any cheaper packages are available.
  • Leveraging Tax Deductions: Also, keep in mind that this profit before taxes calculation includes all of the costs that are being used for business management and ongoing costs. It is nice to leverage tax deductions in the form of expenses that are being used. At the same time, you also need to understand that spending the money will have an impact on the profits that are recorded on paper.

The most effective thing that you can do is get personalized advice from an accounting professional.  As a business owner, you don’t need to be an accounting professional. But, you do need to be familiar with the way the numbers work and how they impact your business. You can consult with your accounting team to learn more about the current trends. This information is very important when you are making big decisions that affect your finances.

Tapping into outsourced accounting services is one of the best things that you can do to ensure that you are staying on track for the future. The services of a good accounting team might be the difference to help you avoid common financial pitfalls that are faced by business owners.

If you are looking for support with your small business finances, then we are here to help. Contact us at Easier Accounting to learn more about the accounting services that are available. We specialize in small business accounting, giving you access to team that is leading the industry. Call today to learn more: (888) 620-0770