What’s difference between Salary and Profit? And how to get more of both

 

“How much should I / can I pull out of the business?” is a question we get asked almost everyday.  There are two primary ways a business owner gets paid from the business and it’s extremely important to understand the difference between the two.

 

For business owners, what is the difference between a Salary and a Profit?

Owner’s Salary is your reward for being a good technician (an accountant, a PT, a psychologist, a Videographer, a Financial Planner, a Physio etc).

Profit is your reward for being a great business person (building systems, developing team, defining vision and strategy, improving the numbers, sales and marketing).

It’s the difference between working ON the business and working IN the business.

Think about Clark Kent vs Superman as the difference between Salary & Profit.

Ultimately we all want to be like Business Supermen and Superwomen, with the cashflow and profit to –

• Be strong (financially)
• Help those in need
• Protect our family
• Fly around with nothing holding you back
• And even wear a red cape and your undies on the outside.

But even Superman earns a Salary.

Coming back down to earth, Superman hangs up the cape and becomes the reporter that is Clark Kent.

 

So now that I know the difference between my Salary and my Profit, how much of each do I take from the business?

Getting Cashed Up is about taking a healthy amount of money out of the business.  Here’s what we’ve seen to be healthy.

$0 to $250k Revenue – 5% Owner’s Profit and 50% Owner’s Salary

$250 to $500k Revenue – 10% Owner’s Profit and 35% Owner’s Salary

$500 to $1M Revenue – 15% Owner’s Profit and 20% Owner’s Salary

$1M to $5M Revenue – 10% Owner’s Profit and 10% Owner’s Salary

$5M to $10M Revenue – 15% Owner’s Profit and 5% Owner’s Salary

$10M to $50M Revenue – 20% Owner’s Profit and 0% Owner’s Salary

The rest of your revenue goes to the tax man and to paying for the many expenses of running a business – rent, wages, subscriptions, insurances etc.

 

So when can I give myself a pay rise, without bleeding the business dry?

Naturally you want your business to fund your growing lifestyle and aspirations but it’s important to take things easy and not take too much too soon.

Taking too much money from your business too soon would be like not giving a growing baby enough nutrition and sustenance that it needs in the early days in order to grow into the strong adult it has the potential to be.  You will stunt your growth.

Taking too little money from your business can similarly starve you, the business owner, of the vital funds you need to live a good life.  We’ve seen way too many entrepreneurs who haven’t paid themselves in years, haven’t been on holidays since they started the business and feeling totally unrewarded for all the hard work they do.  A highly unrewarded founder can result in poor performance, lack of endurance and low energy & enthusiasm in the business (which starts a cycle of even worse business results and even less available revenue.

So stay within the healthy ranges for Owner’s Profit and Owner’s Salary and as you increase your revenue and reduce your unnecessary expenses, you’ll be able to take more and more.

 

Why does the suggested Salary go down while the Profit go up?

You may have noticed that Owner’s Salary goes from 50% > 35% > 20% > 10% > 5% > 0% as the revenue increases. Why is that?

Ultimately being the owner of a Cashed Up business isn’t about HAVING to show up every day to be a good technician (an accountant, a PT, a psychologist, a Videographer, a Financial Planner, a Physio etc).

In fact it’s impossible to achieve high levels of revenue if YOU are the only one that can deliver your product or service.  You only have so many hours in the day after all.

As you employ more technicians they will be the ones who “work IN” the business while you transition to “work ON” the business.

That’s why the goal is to ultimately pay you nothing in Owner’s Salary because we don’t want you having to work as a technician.  Your reward lies in Owner’s Profit, which we now know is your reward for being a great business person.

So ask yourself –

What systems do I need to build?

What team would I need to assemble?

What is my future vision for the company?

What are the KEY NUMBERS that will indicate that I’m on track with my vision?

How can I improve my sales & marketing systems?

Answer these questions well and implement the ideas like crazy and you are well on your way to getting Cashed Up!

 

Download CRB – Target All Location Percentages TAPS file here

FAQ: Why does the Cash Rich Business method teach us to put only 15% aside for tax, when I pay way more than 15% tax!?

Good question –
You probably pay more than 15% tax, some of us pay up to 47% tax but you have to remember what this is a percentage of …

Let me explain –
You are taxed on your profits, not your revenue. That’s why in one sense it’s good to pay more tax, because it means you’re earning more profit. Just don’t pay more than you are legally required to! So according to Cash Rich Business, for $100 real revenue, you’d put aside 15% or $15 into your Tax – No Temptation Bank account.

Is that enough for the Tax Man?

Well let’s assume you pay tax at 20%. If $100 real revenue came in, and you incurred $50 worth of expenses, you’d pay 20% tax on the $50 that’s left – which goes to

Profit and Owners pay.
Tax Due (20% of $50) = $10
Balance in Tax reserve = $15

So the 15% of Real Revenue is a Target Allocation Percentage for tax, which aims to cover both your business (profit) and personal (owners pay) tax obligations.

Does that make sense now? As always, post any questions below.

Where 99% of business owners go wrong is they use tax, profit and owners pay to fund operational expenses which are way too high, and they never, ever become a Cash Rich Business. What a shame.

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Congratulations to the #InspireFamily aka clients of Inspire CA.

We’ve been busily researching the latest in tax law and have found a number of strategies that will either save you tax, increase your wealth and / or accelerate your cashflow.

Thanks to your prompt action, we are well on our way to our campaign goal – Save $500,000 Tax by 30 June.

Beginning next week, we will begin personally walking each of you through these strategies, including the good and bad news about the recent federal budget update.

Applications to join the #InspireFamily are now closed.

Our next intake will begin in the new financial year.

Why do we have a waitlist?

In order to deliver our accounting service in a remarkable way, we need to do a few things very differently to other firms –

• We’re selective about who we work with
• We limit our capacity of new clients and
• We plan when accounting projects are done

This is the magic behind how we deliver a 5 star service – Accounting fees that are paid for by tax saved, help desk responses in 24 hours and 10 day job turnaround.

SECRET … we’re also busy onboarding a few new key team members & specialisations, in order to introduce new ways we can Help Young Families Use Their Small Business to Achieve Big Goals.

Our next intake of Business clients and new ways we can help you will begin in the new financial year.

 

Are you SuperStream ready?

To make sure employer superannuation contributions are paid in a consistent, timely and efficient manner, the ATO has introduced SuperStream.

The key component of SuperStream is that it is compulsory to make your superannuation contributions online with products that are SuperStream compliant.

The easiest way to become SuperStream compliant is to use software in your business that enables electronic super payments – e.g. Xero Cloud Accounting.

 

When does my business need to become SuperStream compliant?

If you are running a business with 19 or less employees, you have until 30 June 2016 to be making your employer superannuation contributions electronically.

If your business has 20 or more employees your cut-off date was 1 November 2015 so you will need to start making these electronic payments ASAP!

How we can help you

If you’re not sure if your business is SuperStream compliant give us a call on 07 3106 3320 or email help@inspireca.com and we can do an assessment for you.

We can also help you implement Xero, an online accounting software, into your business so you can easily make SuperStream compliant superannuation payments for your employees.

 

THANK YOU PHIL – A year of NEW beginnings!

Last Friday the Inspire Team farewelled our friend and Senior Accountant Phil “Shep” Shephard.

Phil has had a big year, welcoming his new baby girl Melody Jane Shephard into the world.

He is now making a move to the sunny coast to be closer to family and…

The bit that excites us a lot at INSPIRE,

Starting his own Accounting practice.

Phil has been with the INSPIRE team since the early days and something he said in a recent team meeting really sums up the nature of the man.

What made April great for me?  I did a $5,000 tax return for a young family who are about to have a new baby and a $20,000 tax return for a family who are going through some pretty serious financial distress.  That’s what it’s all about.

So we’re both very sad to say farewell to Phil, but so so proud of his new young family and wish him all the best in his sea change to the beautiful sunshine coast and foray into business.

If you’ve ever had a dealing with Phil in business or in life, please join us in saying THANKYOU and ALL THE BEST!

 

This Inspiring Business Event is powered by Inspire CA, an uber cool and disruptive accounting firm that is proving that not all accountants are boring.

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Secure your tickets now:

WEDNESDAY 8th JUNE, 5:30pm – 8pm 

Co-Founder of Australia’s 9th fastest growing company shares his rare insights into finding your competitive advantage.

 

Inspiring Business Event with Glen Carlson of Dent Global – June 8, 5:30 pm $50 (Charity)

 

If you’re in business and you want to make a big dent in the universe, you’ve probably asked yourself the following questions recently –

• How do I make the competition irrelevant?
• How do I deliver even more value to my clients, generating more impact and more profit for everyone?  
• How do I get people lining up to do business with me?

So we reached out to what I call the ‘guru of influence’.  His name is Glen Carlson.  

He’s been a mentor and aspirational person that Ben and I have shadowed for a long time.  If you’ve ever read OVERSUBSCRIBED, Become a Key Person of Influence or listened to the Dent Podcast, you’ll know I’m talking about the co-founder of Australia’s 9th fastest growing company Dent Global.

Glen is a wealth of knowledge in the space of becoming a Key Person of Influence, and while he is well known for running a team of 40 in 12 time zones, you may not know he’s originally from the sunny coast.

Glen has agreed to come share his rare insights at our next Inspiring Business Event.

We’ve asked him to go deep on these 5 key elements of influence:

Pitching – Capturing the attention of your ideal customers, team, partners and investors.

Publishing – Developing content that builds authority at scale so you can charge a premium.

Products – Turning a service business into a product business that drives profit & removes you from delivery.

Profile – Personal Branding without the shameless self promotion.

Partnerships – Generating 10x inbound opportunities without advertising.

We can’t wait to introduce you to Glen, and 65 of the  growing Inspiring Business Community.

 

12 STRATEGIES FOR BUSINESS OWNERS TO SAVE $20,000+ TAX

WE’RE HELPING YOUNG FAMILIES IN SMALL BUSINESS ACHIEVE A VERY BIG GOAL – SAVE $500,000 IN TAX BEFORE 30 JUNE.

We’re calling it the …

SAVE $500,000 TAX CAMPAIGN

Imagine for a minute …

What half a million dollars would mean, back in the hands of the Young Families that work so hard to earn it.

• A long needed family holiday?
• A credit card that’s been hanging around – paid off?
• An upgrade to the family car?
• A small renovation to the home?
• A donation to a social cause?
• An investment in the family wealth?

You obviously want to keep as much of your hard earned cash as possible.

We’ll show you how.

The ‘SAVE $500,000 TAX campaign’ kicked off with a LIVE webinar.

12 STRATEGIES FOR SMALL BUSINESS OWNERS TO SAVE $20,000+ Tax.

We educated small business owners and entrepreneurs on the top 12 strategies to reduce your tax, legally.

In the webinar you will learn –

1. Sole Traders, Companies and Trusts: How to maximise your tax savings through Business Structuring.
2. 10 people and entities you can distribute profit to in order to dramatically reduce your tax bill.
3. A little known strategy to pay ZERO tax on growth in your investments.

[su_youtube_advanced url=”https://youtu.be/eJFHSrWdfiw” height=”340″ controls=”no” autohide=”yes” showinfo=”no” rel=”no” modestbranding=”yes”]

The back story …

The Inspire Boys became well known in the local small business scene for their monthly Tax & Accounting subscription service that pays for itself many times over through both tax saved and profits increased.

The game changing subscription service is called IT’S ALL SORTED.

Gone are the days of only hearing from your accountant once a year, getting surprise bills or being charged for phone calls.

Inspire CA is a disruptive accounting firm out to prove that not all accountants are boring.

 

 

Entrepreneurs Of Brisbane – Ezra Taylor

We believe that every business owner has an inspiring story to tell.  A story of how they began.  A story of how they overcame the odds.  A story of what drives them.  A story of when they had a breakthrough.  A story of who inspires them to keep going.  Entrepreneurs of Brisbane is where we tell these inspirational stories, one entrepreneur at a time.

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Hi Entrepreneurs Jessica Kate here, Editor of Entrepreneurs of Brisbane (EOB) and Community Manager at Inspire CA.

Introducing Ezra Taylor from Concrete Training & Movement

“When I first started my business, I had no idea what I was getting myself into. They don’t teach you much about the business side of things when you’re getting your certification. For me, going into business was like being thrown straight into a bullring or fatherhood. You’re not ready for it, but you learnt to adapt pretty quickly. Education has been a massive help as it has taught me to not freak out so much. In fact, you soon realise that there’s no real growth unless you’re thrown into those challenges. So my biggest advice now is, be patient learn how to relax in those stressful times and realise that those are the key time for learning.”

 

What has been you biggest challenge in business and how have you overcome this?

“The biggest challenge for me is accepting that I’m not good at everything. Connecting with people who are good at things that I’m not good at, and asking them for help. I’ve invested in coaches and mentors. Some have worked, some haven’t, but I think aligning yourself with people who have been through the experiences that you face challenges with, and not being afraid to ask for help.”

What’s the key to successfully balancing business life and family responsibilities?

“I think establishing routine and education. Consistency is really the key. We all know what we should be doing and shouldn’t be doing. Some more than others, but I think if you can educate yourself and create a routine around that education.
For example, a practice that I’ve been introducing to everyone is just having a morning routine. Waking up an hour before you have to be anywhere, having an herbal tea, maybe a little quiet time for  meditation and doing a little movement. This will prepare you for the challenges that will come throughout the day. That gives you more chance to  not stress. Which gives you the energy to give back instead of taking, which is what the world needs right now.

Time Your Capital Gains – Hold for 12 months & Sell  in a low income year.

How does this strategy work?

You bought an investment.

A property for example.

Bought it for $200,000, sold it for $300,000.

You made $100,000 profit – wooohoo.

The tax man wants a piece of your pie – booo.

It’s called Capital Gains Tax.

So here’s 2 strategies around TIMING to minimise Tax on your Capital Gain.

Option 1 (Without Tax Planning):  Pay Capital Gains Tax on $100,000 Profit.

 

47% x $100,000 = $47,000 tax.

Or only $53,000 profit left. 🙁

Option 2 (With Tax Planning):  Hold off the sale of the Property until you’ve held it for 12 months.

 

You only get taxed on half the profits.

That’s 50% of $100,000 tax free (woohoo!) and

47% x $50,000 = $23,500 tax.

By timing the sale of your property you’d save $23,500 TAX and get $50,000 of profit TAX FREE, when compared to selling before 12 months is up.

Timing Your Capital Gains Part 2 –

So you’ve had a great year aka your income is high.

Any profits you make on the sale of an asset will go straight onto your (already high) taxable income.

So this TIMING strategy also relates to timing the sale with a year in which your income will be lower.

You know that round the world sailing trip you wanted to take the family on?

Good Timing.

You know that crappy year where nothing really went well in business?

Good Timing.

What do you need to implement this strategy?

• A Business.
• An asset that you’re going to sell at a profit.
• A chat with an Inspire Chartered Accountant – www.calendly.com/inspireca.
• To take action prior to 30 June.

FAQ’s: Timing Your Capital Gains.

Does the same strategy apply to selling shares in my business?

Yes, it certainly does.

What about when I sell shares in someone else’s business e.g. Telstra?

Yep – same treatment as well!

What if I hold the assets in a trust, can I avoid paying Capital Gains Tax?

Nice try – but no.

You cannot avoid capital gains tax.

If you hold assets in a trust, this strategy still applies.

Hold for over 12 months, and sell in a low income year!

NEXT STEPS:  You can book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.

Accelerated Asset Depreciation – 100% deduction NOW if it’s under 20 k.

How does this strategy work?

You buy an asset.  

A car for example.

For running around doing quotes onsite.

Its value will GO DOWN (aka depreciate) over time.

So the tax man lets you claim that depreciating value – Thanks, Tax Man!

The key to THIS strategy is the magic number of $20,000.

If the asset is $20,000 and under you get 100% tax deduction NOW.

Option 1 (Without Tax Planning):  Buy a company car for $20,001.

You can claim depreciation … bit by bit over the next 8 years.  Sad Face.

(If you want the detail, here’s how much depreciation you could claim in the first year: Only up to a maximum of $5,000 in the first year, but this amount gets lower the further into the financial year that you buy it.  If you buy the car on 30 June, you would only get a $13 tax deduction!! boring…)

Option 2 (With Tax Planning):  Buy a company car for $20,000.

You get a 100% Tax Deduction this year.  Woohoo!

By purchasing an asset $20,000 and under, you’d  save $9,400 tax, when compared to paying 47% tax in your own name.

BOOM.

So if you were already shopping for a new asset for the business, remember the magic number – $20,000.

• The Coffee Machine for the Cafe
• The Squat Rack for the Gym
• The Drill for the Sparky
• The Abacus for the Accountant (lol)
• The Scanner for the Doctor
• The Microphone and Laptop for the Podcaster
• The Deep Fryer for the Cook
• The Pole for the Dancer
• The Table for the Physio
• The Camera lense for the Photographer

What do you need to implement this strategy?

• A Business that turns over under two million dollars ($2,000,000)
• An invoice for an asset under $20,000 or under $22,000 if you are GST registered and the expense has GST on it.
• A chat with an Inspire Chartered Accountant – www.calendly.com/inspireca.
• To take action prior to 30 June.

 

FAQ’s: Accelerated Asset Depreciation.

Why have I never heard about this strategy?

This strategy has been around since May 2015.

Your accountant should have made you aware if they’re a good adviser for your business.

Why $20,000?

This is the limit that the ATO advised in the May 2015 budget.

What if I turn over more than $2,000,000 can I still use the strategy?

No, sorry.  The strategy is only available for what the ATO calls ‘Small Businesses’ – those who turn over less than $2,000,000.

 

NEXT STEPS:  You can book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.

 

How does this strategy work?

Each month you pay super for your employees.

9.5% of their wage.

For a quarterly payroll of $100,000, that’s $9,500.

Now your Employee Super Payments are typically due on 28th day of the following month after each quarter finishes.

For the quarter of March to June 2016, it’s due 28 July 2016.

But what if we we’re to pay that bill early?

Just one month early.

You’d get the tax deduction now, which is an additional 10 months of cashflow.

Here’s how the numbers pan out…

The company tax rate is 30%.

So this $9,500 Super Bill would reduce your tax by $2,850.

Option 1 (Without Tax Planning):  Pay the $9,500 super bill on time in July 2016 aka NEXT financial year.

$9,500 Super Payment goes out in July 2016.

$2,850 Tax Deduction comes back in August 2017 (when you lodge your company tax return).

13 months later.

Option 2 (With Tax Planning):  Pay the $9,500 super bill early aka THIS financial year.

$9,500 Super Payment goes out in June 2016.

$2,850 Tax Deduction comes back in August 2016.

3 months later.

By paying your employee super payment 1 month early, you’d enjoy $2,850 in your bank account for 10 months longer, when compared to paying on time.

Now a couple of grand extra cashflow for 10 months doesn’t seem like much.

But when you layer a few pre-payment strategies on top of each other, we’ve seen clients with an additional $10,000 – $40,000 cashflow.

That’s a game changing amount.

And with that, you can –

• Sleep at night
• Pay down your debts
• Make a deposit to your Profit War Chest
• Invest in business growth (see step 3 + 4)
• Turn $1 into $2 (see step 5)
• Build a rainy day fund (3 months Business expenses)

What do you need to implement this strategy?

• A Business.
• Cashflow available to pay early.
• A chat with an Inspire Chartered Accountant – www.calendly.com/inspireca.
• To take action prior to 30 June.

FAQ’s: Pay employee superannuation in June not July.

When does the payment have to clear the account by?

You need to make your payment before business closes on 30 June. (It must have left your bank account.)

Can I pay more than one month’s superannuation payments early?

Yes you can, but we wouldn’t recommend going overboard.

You might accidentally go over your employee’s super contribution caps ($30k in a year if they’re under 49, and $35k in a year if they’re 49 or older).

Doing this would cost them up to 47% in tax on that super.

Can I prepay other expenses early to get the same effect?

Yes you sure can (so long as your business turns over LESS than $2,000,000 in a year).

And you’re not prepaying an expense for any more than 12 months.

NEXT STEPS:  You can book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.