Are your financials suffering from distortion?

This time last year I was doing what most business owners are advised to do by their tax specialist: I paid myself the minimum salary to qualify for state pension and then topped the rest of my salary up with dividends.

You generally pay less tax, and this idea is so compelling that few people stop to question it. But not my hero hashtag#GregCrabtree.

Greg is an American CPA who’s written a book called “Simple Numbers, Straight Talk, Big Profits”. In this book Greg challenges the way I think about my business.

Greg argues that the salary-through-dividends approach is highly dangerous for business owners who rely on their P&L financials to make business decisions.

Dividends do not appear on your standard profit and loss report (P&L). So when you run only a tiny part of your salary through the P&L, it artificially inflates your profit margins. This leads the business owner into a false sense of security about how the business is doing.

For example, in a market where customers are tightening their belts, you might think that you can afford to lower your prices as a strategy for securing a customers.

A very dangerous decision. It may help in the short term, but when it comes to growing your business you will already be frustrated by the lack of cash resources you have to do this.

By the way, for most small businesses I have calculated that the tax savings on a salary-through-dividends approach does not even hit four figures.

So your grand ambitions are continually frustrated by a lack of surplus cash. All because you elected to save yourself a few hundred quid on tax.

Since taking this advice I have transformed the way I value my product and the way I conduct my business, and I urge you to buy a copy of Greg’s Book today.

And, if you want to learn more from me about how you can build a cash generating business please follow my LinkedIn feed because I’ll be dropping regular nuggets of wisdom to help you grow your business.