Take profit FIRST and then pay everything else, or else you won’t have any profit left.

Profit is often defined as what’s left when you subtract your expenses from your revenue. Say you make $10,000 in a month, and then spend $9,000. You’d have $1,000 left, or a 10% profit margin.

In theory that works great, but in practice, that profit margin can often get spent because it’s there to spend.

Instead, it is important to take the profit out first for your business, just as it is important to pay yourself first in your personal finances by saving and investing.

Why? Because profit leads to growth. If you take the profit first and put it in a separate account where it can’t be spent, then it starts to accrue. You then have cash available to invest in the business or pay yourself dividends.

Yes, even small businesses can pay dividends to their owners!

It also means that being profitable is a priority for you and your business. Being profitable means you’re more resilient when things get bad, like the last year with the uncertainty of the pandemic. It means that you’ll be around to serve your clients in deeper ways over a longer period of time.

Start small. Take 1% of what you make as profit and put it aside. Then adjust every quarter and increase that percentage little by little. It adds up slowly, then less slowly, then a lot over time.

Choose to be profitable, then prioritize taking profit first.

Here’s the deal – you gotta pay taxes, and you gotta prepare for tax season so you’re not caught off guard.

If you have set your business up as an LLC, you’ll want to pay quarterly estimated taxes. The IRS likes their money, and they like it early.

Work with an accountant, even for just a single call, to ensure your business is set up correctly and you are estimating your taxes properly.

What’s worked for me is saving 15% of “real revenue”, meaning the revenue the business brings in after I pay contractors and the costs of producing the product I create.

Then I divide that estimated number by 4 and pay that amount when quarterly estimated taxes are due.

Even then, I always save 15% in a tax account and save it until tax time. Some years I end up with more in that account which makes for a nice bonus. Other years I owe more than I paid in estimated payments, and it’s nice to have that amount just sitting there.

The business also takes care of any personal taxes I may owe, which is one nice thing about having a separate entity rather than using your personal business account(s) to run your business.

Since taxes could end up being thousands (or tens of thousands) of dollars each year, it’s worth taking the time to prepare properly to pay them in full each year.

@darentsmith | daren.blog

One of the downfalls of many creators who want to turn their craft into a business is investing in the wrong things.

Assets are investments that generate more money for you, while a liability costs you money.

Your office is not an asset – you have to pay for it every month.

Your computer, your equipment, anything you own outright that you use to make money is an asset.

But let’s take it a step further.

Investing in a bunch of equipment on it’s own won’t help you grow your business. Cameras, computers, hard drives, and the like, if they just sit there, won’t generate any money for you on their own.

But, if you use that equipment to create assets that compound, that’s the goal of a successful creative business.

Use your camera to take photos that you then sell online. That single creative effort can pay you forever.

Use your computer and recording equipment to record a song that you can sell and license.

Write a book that you can self-publish and sell online.

There has never been a better time to be a creator, because you could, today, with just your phone, start a creative business and start creating selling digital projects to anyone in the world.

Start thinking about where you spend your time and money. Invest in and create assets that compound over time, and your business will start to grow.

@darentsmith

One main reason why creatives fail at becoming professionals – making a full-time living from their work – is because they are not financially literate.

Financial literacy can be summed up like this:

• know how much money you need, how much money you make, and how much money you spend.
• understand how to make more or spend less and when to make those decisions
• create a business that supports your work that generates the results you want for your lifestyle

Over the next month I’ll write a short, “atomic” essay every day on a different topic. Read each one and by the end of the month your financial literacy will be much improved.

How much money your creative business needs is a simple equation:

How much money do you need to support your lifestyle? That includes all of your personal bills, savings, spending, etc.

How much money did you spend from your personal bank account the last three months? Divide that number by three and that’s how much you spend.

Now double that number.

That’s how much your business needs to make each month to afford taxes, operating expenses, paying yourself, and to have a little profit for growth.

@darentsmith