What to do with extra profit

A good year leaves more cash in the business than you planned. Without a plan, it tends to disappear into slightly bigger spending everywhere. With one, it can pay down debt, cut this year's taxes and move your family's goals forward.

Here's a simple order of priorities. Most owners work down it, filling each step before moving to the next.

A simple order of priorities

Fill the cash cushion to your target, usually about three months of costs.
Set aside the tax on the extra profit. It will be owed whether you spend the cash or not.
Pay down high-interest debt, such as credit card balances and expensive short-term loans.
Fund retirement: the business can make larger contributions in a strong year, which also lowers this year's tax.
Move money toward your family's goals, such as a house, college, or time off.
Reinvest in the business where the return is clear, or invest the rest.

Use the timing

Extra profit late in the year opens up year-end tax moves: equipment you'd buy anyway can be put in service before December 31, retirement contributions can be maxed, and some expenses can be prepaid. Each can lower this year's tax, but only buy what you'd buy anyway. A deduction doesn't make an unneeded purchase free.

Decide before you take it out

Money that lands in a personal checking account tends to get spent. Decide where each piece of the extra profit is going first, then move it straight there: the tax account, the retirement plan, the savings account for a specific goal.

Don't mistake a good quarter for a good year

Check that the extra profit is real and lasting before committing it. A large customer paying early, or a seasonal peak, can look like extra profit until the slow months arrive.

Common questions

Should I pay off my business loan early?

Often only if the interest rate is high. Low-rate debt can be cheaper to keep while the cash builds your cushion or retirement savings.

Is it better to reinvest in the business or invest outside it?

Reinvest where the return is clear and measurable. Otherwise, diversifying outside the business protects your family if the business has a hard year.

What year-end moves lower taxes?

Common ones include buying planned equipment before December 31, retirement contributions, and prepaying some expenses. Each depends on your situation, so check with your CPA.

How much should I set aside for taxes on extra profit?

Roughly your combined federal and state rate on the extra amount. The quarterly estimated tax calculator can help you see the total.

Your numbers, worked out for you

Cratchit keeps the books for every company, shows what's safe to take out, forecasts the next 13 weeks of cash, and tells you what needs your attention. Take a guided tour with the Harpers, a sample family.

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Education, not advice. Confirm the details for your business with your CPA.