Q4 is finally upon us which means, for many of us, we’re about to be in the season of affiliate launches, discount codes, BOGOs and Black Friday Sales.
For a lot of coaches, consultants and course graders, this is the time of year where we get anywhere from 50-60% of our annual sales. Along with those sales comes a lot more cash in the bank than we normally have and that’s great!
But, I see so many entrepreneurs making bad spending decisions with that cash at the end of the year so today I want to share with you the top 3 mistakes that I see so many online business owners making!
And I’m going to share with you the number one tool you can use to avoid making those mistakes. Let’s go.
The Three Mistakes:
The first big cash decision that I see entrepreneurs goofing up is they have their big launch and they've got all this cash in the bank so they decide that they are going to spend it to reduce their net profitability.
If you’re a sole-proprietor or an LLC, your tax liability is generally based on the net profitability of your company.
Remember that Revenue - Expenses = Net Profit.
The line of thinking goes, “alright I’ve got all this cash and a lot of net profit at the end of the year but I don’t want to pay taxes on that.”
So what do they do?
They go out and decide:
“I’m going to buy this new MacBook Pro.”
“I’m going to invest in this high end coach.”
“I’m going to take one of those trips to Tulum that all my friends do.”
All for the sake of reducing the net profitability of the business to lessen the tax liability.
The problem with that is that most of the time these expenses are just things that the entrepreneur drums up purely for the sake of reducing their tax liability.
This strategy is completely ill-informed.
Now, don’t get me wrong, I want you, as a business owner to pay the lowest possible taxes (as long as it’s legal and ethical!).
In fact, we help our clients do that all the time but the reality is that you need to have a healthy amount of net profitability in your business every year.
After all, net profitability is what goes toward paying things like owners distributions which fuels future growth. It’s there for retained earnings. Having net profitability is really important and it’s a general indicator that your business is doing well.
The downside to that is, yeah, you’re going to have to pay taxes on that profitability but spending tens of thousands of dollars on expenses that your business doesn’t actually need in order to save a few thousand dollars in taxes?
That’s just silly. It’s like stepping over dollars to pick up nickels.
The takeaway here is that it can make sense for you to go ahead and spend this year on expenses that you would need to spend next year anyway in order to fuel growth for your business. But, don’t throw tens of thousands of dollars toward unnecessary expenses just so you can stick it to the man and pay a lower tax bill!
The Second Mistake:
The second mistake that I see is also tax related and this usually comes on the heels of having a fantastic prior year where you’ve got record revenues and profitability and you think about, “what do I need to invest in my business so that I can strategically grow over the coming years?”
Maybe you decide that now is the time to invest in growing your team or double-down on that marketing strategy that worked so well for you before or invest in a copywriter and branding project to really elevate things and start charging more.
And those are all absolutely amazing things.
The problem comes three or four months in the next year when your CPA hands you that HUGE tax bill because you had so much net profitability and you’ve only been thinking about things you need to invest in to grow but you didn’t earmark any money for that tax bill.
I’ll tell you this, when you get hit by a surprise tax bill for anywhere from 20 to 100 thousand dollars in April, it is an absolute momentum killer because now it’s time to make some really tough decisions.
You’ve got to figure out how you’re going to pay that bill. Do you get a loan or credit card at 19% interest to pay it? Do you ask for a payment plan from the IRS? Because if you do, now you have cash outflows every month to pay your current taxes and your past taxes—oh by the way, those all come with penalties, interests and fines.
It can start to get really expensive really quickly and it can paint an entrepreneur into a corner.
My takeaway for you here, now that we’re approaching the end of the year, is sit down with your tax preparer, look at your profitability and your cash position as you enter Q4. Really have them help you figure out how much cash you should be setting aside for those tax payments that are inevitably going to be coming due in the next few months.
The Third Mistake:
The third and final big mistake that I see entrepreneurs making with cash at the end of the year is deciding to pay themselves too much money.
This is kind of ironic because throughout the year entrepreneurs typically underpay themselves, we’ve all been guilty of it. If you’ve been in business for more than a few months, you’ve probably come to a point where you’re like, “I’m not going to take home any more this month because I’ve gotta pay my team and I want to leave some retained earnings in my business for a rainy day.”
It seems like we’re the last one to get paid but for some reason when we get to December, especially in the wake of successful launches and Black Friday sales, we decided this is the period to really splurge on ourselves to make up for all that pay we left on the table earlier in the year.
The problem is we tend to overpay ourselves.
Now, don’t get me wrong, I absolutely want you to pay yourself at the end of the year. In fact, I would love for you to bonus yourself at the end of the year if that serves you and your business well.
But you HAVE to be forward looking about it.
You have to be thinking about how much cash you can afford to bring home and how much cash you need to leave in the business so that you’re set up for success in 2022.
That really is the common thread among all three of these mistakes. To make truly smart cash spending decisions, you’ve got to be forward looking and thinking. You have to not only be mindful of how much you need today but you also need to be thinking—
“How much cash do I need next week?”
I know what you’re thinking, “Yeah Mike, that’s all great in theory but HOW do I actually do that?”
Well, it turns out there’s actually a term for it called cash flow forecasting and, I’ll admit it, sounds fancy and confusing but it’s not.
First, you’re going to look at the amount of cash you have in the business today, then you’re going to look at how much cash is coming into the business over the next weeks/months/quarter and you’re going to look at how much cash is going out of the business over that same time period. Then you’ll do a little addition and some subtraction to determine how much cash is going to be left.
Once you have that all mapped out, you can go in and start to ask yourself, “how much cash can I afford to pay myself at the end of December?” Because you understand what your cash needs and balances are, you can go in and start playing around, moving the pieces to figure out what’s the safe amount of money to take home.
It’s a really empowering exercise and if you want to make spending decisions with confidence, I highly recommend you get into the cashflow forecasting game.
But now you’re probably thinking, “Where do I even start with all this cash flow forecasting stuff? Do you have some kind of tool that I can use? Are there any tips, tricks or resources that you can give me to help me get this cash flow forecasting thing in place in my business?”
The answer is YES!
I’ve decided to launch a 5 day cashflow challenge starting November 8th where I’m going to walk you through, step-by-step, everything that you need to do in order to get a really meaningful cashflow forecast in place for your business.
I’m going to give you the same tools that are typically exclusive to my high end coaching and CFO clients.
After I’ve walked you through how to fill out your cash flow forecast, I am going to wrap everything up at the end of the week by going live for 90 minutes and answering as many questions as I possibly can from the audience to help them get their cash flow forecast in place.
The cool part?
It’s 100% free.
You can sign up here.
This is something I’m doing at the end of the year because I want business owners to be ready to go, have all the momentum and cash that they need going into 2022.
I can’t wait to see you starting November 8th.