Is the best business growth strategy accumulating cash or reducing taxes paid?
Every year you’re faced with this critical decision: should I accumulate cash to build my company or reduce the taxes we pay?
What’s the connection between company growth and taxes?
At year’s end your Profit and Loss Statement shows the company’s EBITDA (earnings before interest, taxes, depreciation and amortization.) The amount on this line is subject to federal and state taxes. Therefore, your CPA or other adviser may show you how to reduce taxable earnings, which reduces the taxes you pay.
In order to reduce taxable earnings, you must take a portion of the earnings money out of the business.
Don’t get me wrong, the money doesn’t disappear. The smart CPA or adviser will ensure that the funds are put in appropriate retirement or other legal accounts. It will accumulate and grow, and you will have access to it years in the future.
The company’s growth is affected because there is less cash on hand for the company to spend on growth.
Why is Cash A Big Deal?
What’s been one of the most frequent pieces of business news for the past decade or more? It’s how much money companies raise from investors. Every start up wants investors and more established companies are often looking for additional rounds of funding. Why? Because they need cash to spend on growth.
The size of these “raises” is mind-boggling.
Your low-midmarket or small services company may not be in that league. That’s fine, our economy needs your company and companies like it to support widespread economic growth.
We do need to take a lesson from these newsmakers: cash on hand is the difference between success and stagnation.
Consider this simple example.
EBITDA is $1,000,000.
Tax rate is 30%
Taxes paid are $300,000
Cash accumulated in the company is $700,000.
EBITDA is $1,000,000
Legal actions reduce taxable income to $500,000
Tax rate is 20%
Taxes paid are $100,000
Cash accumulated in the company is $400,000
Which cash balance gives the company more superpower?
How does Cash Further Company Growth?
With plentiful cash you can:
- Invest in your people; hire additional people
- Invest in your marketing, sales and customer service
- Invest in the development of new offerings
- Cultivate and nurture current buyers and treat your clients to appreciation events
- Grow by acquisition or vertical expansion.
- Take good risks
One TCG client chose to keep more cash in the company and then hired a highly skilled expert who within months brought in several million dollars of new revenue.
Having the cash in the company to cover this person’s first year of compensation allowed the founder to make this key person hire. Their coffers are overflowing.
It’s Not One or the Other Forever
My recommendation is that you make decisions about earnings, taxes and cash accumulation fresh each year. Consider what opportunities lie ahead that you can leverage with cash. You may decide to accumulate cash for 2 or 3 years running in order to double, triple or more the size of the business. After reaching that size, the dollar amounts are much bigger, and you can revisit the decisions regarding taxes and cash accumulation.
We have seen the difference larger accumulations of cash have on companies. Cash is a superpower that has no rival. Speak with your professional advisers about how your company can make the right decision each year.
Trivers Consulting Group is expert helping low mid market and small services companies increase EBITDA or what’s commonly known as the “bottom line” so they have cash on hand to spend growing the company.
Are you curious about how we do this? We’d love to have a complimentary conversation to discuss your current revenue and cash situation. If the fit is great, together we can plan to put you in a cash-rich position. Give us a call. 703-801-0345.