When you first begin your small business journey, your main objective is to build a sustainable business. You may not expect to make a profit for a few years. Many fintech startups don’t go into the black for several years, particularly those with significant startup costs on their balance sheet. However, sooner or later, if you do everything right and the economic winds are behind you, your fintech SME will start making money. The question you have to deal with at this point is what to do with the profits.
Reinvest in the Business
The most obvious way to deal with profits is to reinvest the money back into the business. In the early days, this won’t be optional, as you will need every dime you make to grow the business. Cash flow is critical. Without healthy cash flow, your business will suffer and grind to a halt. It is difficult to pay creditors or staff salaries with insufficient cash reserves. Diverting excess profits into a cash reserve account for a rainy day is a sensible way forward. This will give you a useful cushion of cash in the event the business is hit by unexpected expenses.
Dividends are a tax effective way of withdrawing cash from a business. Most business owners pay themselves a salary and top this up with dividend payments. There are strict rules concerning dividend payments and you can’t just withdraw cash from the business’s bank account each time you need money. Dividends have to be agreed at a board meeting before they can be issued. There also needs to be sufficient distributable profits for dividends to be paid, or you become liable for paying tax on the money.
Many small businesses make donations to charitable causes. It is a way of giving something back to the local community and supporting organizations you feel strongly about. However, whilst there are tax advantages attached to using some of your profits in charitable donations, you need to support the right organizations.
Non-profits are not driven by shareholders. They have different financial and legal obligations and their non-profit status qualifies them for tax exempt status. The majority of charities are run ethically and above board and their primary goal is to help others. However, some individuals set up charities with the express aim of lining their own pockets, so before you support as charity, it is a good idea to check their financial status. Anyone can check the financial status of a non-profit by running a 990 search. Make sure you do this before handing over cash to support a cause.
Invest in Your Pension
Reinvesting profits in a pension plan is a tax effective way to use excess profits from a business. Any money you place in a pension plan is not subject to personal taxation, so if you don’t need the money, skip the dividends and place your share of the profits in a pension pot.
Always speak to your accountant before making financial decisions in your fintech company.