“Profit means tax, and tax is bad.”
Early in your entrepreneurial career, that “lesson” can take root in your brain.
But like a lot of the things we learn early in any journey, this “lesson” needs to be updated or it can block further progress (or make us miserable).
There’s a lot of “tax is bad” messaging out there. You might have seen some of them before:
- “Tax is the biggest expense in your business”
- “Don’t throw away money to the government, they’ll [do X] with it”
- “Use this one weird trick to reduce your tax bill”
If I said that I wished you had a multimillion-dollar tax bill, and your immediate reaction is negative, then I’ve proven my point.
A multimillion-dollar tax bill means that you and/or your business is earning anywhere from 1-10x that amount, but our brains get so stuck on “tax is bad” rather than “profit is good”.
“Tax is bad” leads to stupid decisions
If you believe that tax is bad, and therefore profit is bad because you’ll have to pay tax, then you’ll make a whole bunch of stupid decisions in your business that stunt your growth.
An obvious, conscious example is spending lots of money at the end of the tax year on things that your business doesn’t really need, just to reduce your tax bill. There’s nothing wrong with spending to legally minimise your tax bill, if they are sensible spending decisions without the tax factor, e.g. the business has the spare cash, and the things you spend it on will have a good ROI. But maybe don’t prepay the fees for that freelancer or agency that isn’t doing a good job.
A harder-to-spot, subconscious form of sabotage: putting off that new marketing initiative you’re confident will work, or delaying responding to that potential customer that’s ready to buy. There can be other reasons why you sabotage this way, but the “tax is bad” message is one not often talked about.
“Profit is good”
As a way to counter the “profit is bad” connection in the brain of many entrepreneurs, a while back I wrote a post about what profit is used for apart from tax. Here’s the quick list of good things that profit is used for:
- Returns for owners: you are holding a high-risk asset (the business), so you’d better be getting a good return on it or else consider investing elsewhere.
- Impressing investors: a lot of investors will want to see that you can turn money into more money. Some will prefer to see less profit and more growth, of course.
- Loan repayments and impressing lenders: reducing the balance of your debt comes from profit, and lenders will want to make sure you can repay.
- Savings: profit grows your savings, whether you keep them for a rainy day or as a war chest ready to take on the “lucky” opportunities available for prepared people.
- Working capital: the business needs money in the leaner times, and (for many businesses) increasing working capital to handle larger volumes of payments as it grows.
- Asset purchases: you’ll need investors, lenders or savings to purchase assets, even if your online business only needs laptops and website redesigns rather than manufacturing equipment.
- Business growth: profit can be proof that your business model works, and generally growth expenses require payment before you get the results.
Look for how the “tax is bad” limiting belief might be influencing your decisions in a negative way.
If you want some help with this, or anything I’ve said isn’t clear, then you know where to find me.