How can a small business maximize profits?
Small businesses generally want to maximize their net income. Net income is essentially the profit available to shareholders after incurring all expenses (after tax profits).
A simple example is if a company earns $100,000 in revenue, spends $50,000 on operating expenses and $8,000 on income taxes, the net income would be $42,000. This is the amount that would be available to the shareholders to withdraw (such as through a dividend) or re-invest into the business.
Therefore, it is logical that to maximize profits, a company would want to increase revenues and decrease costs.
How can a small business increase revenues?
To increase revenues, there are strategies that could help accomplish this, including increasing marketing/advertising efforts, client relationship building, expanding product base, expanding geographical outreach and many others. It should be noted that these efforts often have costs associated with them, so an increase in revenue may not necessarily offset the associated expense.
How can a small business reduce costs?
To decrease costs, there are cost-cutting approaches a business can take. Every business would need to examine their costs in detail as to determine whether there are expense categories that can be reduced. Variance analysis, benchmarking and many other techniques are available as to drill down on areas where expenses may be higher than they need to be.
How do income taxes affect profitability?
The corporate income tax expense is often a significant expense for many small businesses. In 2017, for income eligible for the small business rate, the rate in Ontario was 15% (this rate will be decreasing for 2018).
For example, if a small business eligible for the small business rate earned $100,000 of taxable income, the tax liability would be $15,000. Therefore, as a small business owner who wants to maximize their net income, an important question is “How can I legally reduce my taxable income so income tax expense is minimized and after tax profits are maximized?”
How can a small business reduce it’s tax expense?
The Income Tax Act allows for business expenses to be deducted for tax purposes, if the expense is required to be made for the purpose of gaining or producing income and the outlay or expense was reasonable in the circumstances.
It should be noted that income does not need to necessarily result from the specific expense in order for it to be deductible. As a general rule, costs incurred as a direct result of business operations are considered to be a cost of the business.
Assuming the conditions above are met, the next step is to determine the tax treatment of the specific expense. There are many expense types that are fully deductible for tax purpose. There are others that have unique rules where only a portion of the expense is deductible or where the deduction is to be taken over a specific time period. Other expenses may not be deductible for tax. Each expense type generally has it's own rules which would need to be examined.
Although it may sound complicated, my suggestion to small businesses is to properly record all business transactions in their general ledger. When it comes tax time, have an accountant review your account balances and transactions and have them prepare your corporate tax return. The accountant can also provide tax planning. That way, you can be sure that all of your business expenses are recorded, while your accountant can make sure the correct and maximum deductions are taken for tax.
The end result would be a tax expense that is minimized which ultimately will lead to higher after tax profits for your business.
Disclaimer – The information contained in this article is for information purposes only. Jonathan Elias Professional Corporation takes no responsibility for any actions taken by readers of this article. Jonathan Elias Professional Corporation advises that readers contact a tax professional for any matters relating to their tax situation.