So you sold $1,000,000 worth of widgets online, and your net profit for the year was $100,000.
Pretty cool! Give yourself a pat on the back.
Actually wait.
What was your salary?
You did have a salary... right?
Take a step back and imagine that you wanted to hire someone to do your entire job. Doing all of the product sourcing, marketing, finances, managing some employees, vision, strategy, direction, and generally just running your entire business.
What would you pay that person?
$75,000?
$100,000?
Now look back at your net profit for the year and subtract that amount.
In the case of our example above, it turns out your business had an actual net profit of $0.
Your COGS, or labor, or overhead, or expenses, or advertising, or SOMETHING is way out of whack for your business to be making $0 a year.
Here's the thing:
>>> Your net profit needs to be calculated AFTER your salary is calculated into the expenses. <<<
Do you need to take a huge salary?
No, you don't. That's not what I'm saying. (but it better be a "reasonable" one if you file taxes as an s-corp. Thanks @MJ DeMarco)
If you don't need the business to pay your bills, then re-invest as much as you can and put in all the "sweat equity" you want. That will pay back dividends for you later.
Just don't pretend that because you're not taking any money out, that you actually own a healthy business that's making $100,000 a year. Because you don't.
When you are making 10-15% net profit after all bills have been paid, and all employees taken care (including yourself at a FULL MARKET WAGE), then congratulate yourself... and keep kicking a$$.
(gifs added so that you would scroll through a boring thread about finances)
Pretty cool! Give yourself a pat on the back.
Actually wait.
What was your salary?
You did have a salary... right?
Take a step back and imagine that you wanted to hire someone to do your entire job. Doing all of the product sourcing, marketing, finances, managing some employees, vision, strategy, direction, and generally just running your entire business.
What would you pay that person?
$75,000?
$100,000?
Now look back at your net profit for the year and subtract that amount.
In the case of our example above, it turns out your business had an actual net profit of $0.
Your COGS, or labor, or overhead, or expenses, or advertising, or SOMETHING is way out of whack for your business to be making $0 a year.
Here's the thing:
>>> Your net profit needs to be calculated AFTER your salary is calculated into the expenses. <<<
Do you need to take a huge salary?
No, you don't. That's not what I'm saying. (but it better be a "reasonable" one if you file taxes as an s-corp. Thanks @MJ DeMarco)
If you don't need the business to pay your bills, then re-invest as much as you can and put in all the "sweat equity" you want. That will pay back dividends for you later.
Just don't pretend that because you're not taking any money out, that you actually own a healthy business that's making $100,000 a year. Because you don't.
When you are making 10-15% net profit after all bills have been paid, and all employees taken care (including yourself at a FULL MARKET WAGE), then congratulate yourself... and keep kicking a$$.
(gifs added so that you would scroll through a boring thread about finances)
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