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Retained Earnings Are Key to Your Company's Success
Business owners who want to understand the single-most practical way to measure the upward trajectory of their businesses need look no further than the account called retained earnings. This is an equity account appearing at the bottom of a company's balance sheet. The meaning of "retained" is that the account represents earnings since the company's inception that have not been distributed to the business owner.

The "balance" component of the company financial statement arises from the fact that the retained earnings account is offset by assets accumulated by the business - such as cash and equipment - less any amount borrowed. Therefore, the retained earnings account is often referred to as "net assets."

Growth of retained earnings occurs as a consequence of profits undistributed to the owner(s), so distributions reduce retained earnings. The reduction in company cash for a distribution is balanced against retained earnings. Retained earnings, however, don't change during the year. Rather, they should always match the prior year-end balance. Current year net profit and owner distributions are rolled into retained earnings only when the year ends.

When a business is growing, it needs more resources. The enterprise requires cash to fund expenditures prior to revenue collection-such as additions to inventory, machinery, or operating funds to pay advance costs.

However, a business owner who distributes newly incurred profits will likely experience future working capital problems as the company grows. Wise entrepreneurs permit retained earnings to rise along with profits. So be wise. Ensure you keep your eyes on that account at the bottom of the balance sheet.

Relying on Your "Retirement Safety Net" May Be Risky
Yes, business owners can retire. But they need to consider all options. The reason many small-business owners don't adequately prepare for retirement is that they often view the businesses as their retirement safety net. When they retire, they expect to transfer the firm to a family member or sell it and turn it into cash. In the meantime, they plow earnings back into the business to keep it growing.

According to financial professionals, this all-the-eggs-in-one-basket approach is a very risky retirement planning strategy. There are many options available to sole proprietors as well as small-business owners who want to offer savings plans to employees and themselves. These include:
  • A SEP-IRA - a tax-deductible retirement plan similar to a traditional IRA but targeted to solopreneurs.
  • A SIMPLE IRA - designed for small-business owners with fewer than 100 employees. Pretax contributions are deducted directly from employees' paychecks.
  • A Solo 401(k) - self-employed individuals with no employees can contribute a maximum of $53,000. A spouse who works in the business can contribute the same amount.
  • A SIMPLE 401(k) - another retirement vehicle for businesses with 100 or fewer employees. Account-holders can borrow against the money in a 401(k) and make withdrawals penalty-free in cases of financial hardship.
Funds invested in a diversified retirement plan trim the tax bill now and grow tax-deferred until withdrawals are made later. Usually, the cost of opening and administering a retirement savings plan is modest. Some 401(k) providers actively target small businesses and even offer access to retirement planning experts.

Flying High: A Guidance System Can Steer You to Success
It's human nature to make goals to lead us to success. But it's also human nature to lose those goals in the face of everyday concerns.

As poet Robert Burns famously said: "The best laid schemes o' mice an' men / Gang aft a-gley."

What we need is a guidance system similar to those in airplanes, suggests author and coach Terri Murphy in a recent article in RISMedia: "(An airplane has) a guidance system that continually adjusts the nose of the plane to make course corrections, which keeps the plane in the intended target."

Most of us, however, don't have a guidance system and, rudderless, let our plans go awry.

Murphy suggests a solution: Define three top goals that, if achieved, will "make you feel super successful."

Home in on one daily key priority that represents a step toward your goals. A weekly checklist and an action plan will encourage you to complete the daily activities that support your top priority.

At the end of the week, assess your progress and tweak your plan accordingly.

And, most importantly, keep referring to your top goals and don't slip back into those "comfortable" habits that keep you from achieving them.

While we may lack an airplane's guidance system, we humans do have the ability to plan. To keep those plans in the air, we need a system.

Whether it's Murphy's or a hybrid of several similar goal-oriented systems, it must be sufficiently compelling (and user-friendly) to make you want to abandon your day-to-day crises and concentrate on your success.

How to Spring-Clean Your Business Finances
Spring cleaning isn't just about tidying your home after a long, hard winter. These days, spring cleaning is all about reducing clutter and getting organized.

And it's not limited to the home front. The spring sunshine should also shed light on your business's financial records.


If you obtained a deadline extension to file last year's tax return, completing this process will be your top priority. Provide your bookkeeper with those final clarifications, and give your tax accountant any missing facts to calculate the last of your deductions. Putting last year in your rearview mirror permits you to focus on this year.

A tax liability is already accruing as the present year unfolds. When you're able to anticipate that amount, you can begin to plan for it. Current-year taxes are payable throughout the period, and penalties mount if you wait to remit your income taxes.

If your business's bookkeeping is a bit untidy, it's difficult to identify your taxable profit.

Make sure the business is not paying for any personal expenses; remember to dedicate one credit card for business-only purchases; and know the limit on the deductibility of certain expenditures.

With your accurate bookkeeping, a tax professional will find it much easier to help determine the estimated tax payments for the current year.

Cash flow and growth

Once your income taxes for the prior year and the expected amount for the current year are under control, you have a known amount to spend on expansion or upgrades to current systems. As spring is a time of growth, it's also the ideal opportunity for taking steps to ensure continued profits and rising cash flow.

Weigh the costs of new equipment or machinery against the impact on cash - maintaining a healthy amount of cash to fund the upfront cost of new projects is vital, but extra cash might be best deployed for new asset purchases. If you have to borrow part of the cost, measure the effect of future debt repayment on anticipated cash flow.

Assess your spending: Know which categories of expenses are rising the fastest relative to revenue, and set standards early for controlling cash flow.

Changes to your pricing may be warranted if costs are rising. Plus, you can eliminate waste by altering spending on discretionary expenses.

Budget projections

Spring is also an ideal time to dust off your financial forecast. Establish measurable objectives for the current year; reflect on the goals you envision for your business; then prioritize actions for this year by focusing on cash management.

Compare your cash flow projection for recent months to actual results. Update the budget for this year based on the accuracies and misjudgments of the past. An effective budgeting plan enables you to use available funds in the most productive ways.

A diligent spring-cleaning of your business finances establishes a foundation of sustainable procedures for handling taxes, cash flow, and budget projections. These will support your business through the next winter and into a new spring.
Michele Ball
Perfect Additions
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This newsletter and any information contained herein are intended for general informational purposes only and should not be construed as legal, financial or medical advice. The publisher takes great efforts to ensure the accuracy of information contained in this newsletter. However, we will not be responsible at any time for any errors or omissions or any damages, howsoever caused, that result from its use. Seek competent professional advice and/or legal counsel with respect to any matter discussed or published in this newsletter.
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