As a small business owner, you are constantly balancing many, if not all aspects of keeping the business afloat. You’re the owner, operator, salesperson, marketer, and everything in between so it’s probably true that you didn’t put a lot of thought to how you or your staff gets paid.
Many small businesses start with no regular payment or payroll for themselves or their employees. Eventually, they may convert to an S Corp and establish a little more normalcy with the cadence of income but haven’t thought about it as a strategic measure. This blog post is just for you business owners and it highlights three of many reasons you should consider a profit distribution model in your business.
What do I mean by profit distribution model? All that I’m referring to is a process whereby profits are distributed from the business to you and/or your team throughout the year. To be clear, you don’t need a lot of profits to adopt this method.
1) Profit Distributions Provide a Tangible Reward for your Hard Work
The first reason for employing this type of process is that it provides a tangible reward for your hard work over a timeframe. Using quarterly as an example, if you pay yourself a small profit distribution every quarter, you will receive a monetary reward (even if it’s small). This small reward makes you feel proud, makes you acknowledge and celebrate yourself and business, and provides something to look forward to. The amount of the distribution doesn’t need to be a large sum. It can be as little as a few dollars and maybe you take those dollars and buy yourself a glass of champagne.
Many of us entrepreneurs (and certainly us solopreneurs) don’t have the same metrics and reward system that large organizations do. If you ever worked in a large organization, you may have had a bonus or even an encouraging conversation with your boss that provided some inspiration and acknowledgment. Just because you aren’t working in a large organization anymore doesn’t mean you don’t deserve a little bit of credit and celebration.
2) Profit Distributions Help Create a Positive Culture for your (Future) Employees
Even if you don’t have employees yet, there is a chance that you will one day hire or even partner with someone else that becomes part of your business. This is where many owners don’t focus enough of their energy and time; talent acquisition and culture. It is absolutely imperative that as you’re building this company you are deliberate about the type of company it is, what values is has, what its mission/vision statement is and how that comes through with the tactics you employ.
One great way to incentivize a diverse and highly engaged workforce is to offer benefits or incentives/bonuses. Creating a distribution every so often that either partners or both partners and employees can take part it in will not only spark a light under their butts but will also reward them and make them feel appreciated for their dedication to you. Once you grow your business beyond yourself, your people unmistakably, undeniably, uncontestably become your greatest asset. Don’t be a fool and ignore their needs and desires. Even if you don’t adopt a profit distribution, you should be thoughtful about what you do provide for them.
3) Your Accountant and/or Bookkeeper will Like You More!
Not all bookkeepers or accountants operate the same way but there are many out there that do (and should) be proactively helping you plan for your income situation through the year. This means that they look at your income and expenses at various times over the year and help you, alongside a financial planner, use techniques that can improve your tax situation and save you dollars. While technically you could do one distribution of profits leftover after the year, this doesn’t allow for much when it comes to proactive planning because there are some deadlines (like 401k plans for example) that are 12/31. If you do a distribution only one time, your tax professional and financial advisor may not be able to help you plan for those dollars or help you withhold appropriately for your federal taxes.
If you do a profit distribution quarterly, your tax professional and financial advisor can at least have a more accurate estimate or depiction of what your income looks like as it gets paid out.
In conclusion, I almost always recommend some type of profit distribution (and I personally have adopted quarterly after reading Profit First by Mike Michalowicz). It’s more about the process than it is about any amount so even if you can only pay yourself $5, do it. You won’t be sorry.