Retained earnings a must for all businesses

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  • Working wiser: even small, one-person businesses, should have retained earnings for a rainy day, such as when equipment needs to be replaced

    Working wiser: even small, one-person businesses, should have retained earnings for a rainy day, such as when equipment needs to be replaced


Dear Dave,

My husband owns a small landscaping and masonry company. His profits over the last couple of years have been about $80,000 annually. We were wondering if we should be setting aside some retained earnings.

KIM

Dear Kim,

Yes, all businesses should have retained earnings. In the personal finance world, we would call that an emergency fund. It can be difficult in the business world sometimes. Youíre talking about running a business, making a profit, feeding your family, and saving money in the business. This isnít an easy process no matter how long youíve been in business.

One way to solve the problem, though, is to take a percentage of your profits at the end of the month and set it aside for retained earnings first. Do this before you take any profits home or distribute them under a profit-sharing plan. It doesnít have to be a big percentage, but you should be setting money aside every month for the company.

The beauty of doing this is youíll have money sitting there to replace equipment and other expenditures down the road. Just remember that itís all taxable. Whether youíre in an LLC, Sub S Corp or sole proprietorship, any money you make as profit ó whether you take it home or not ó is taxable. So your retained earnings may be saved, but they will be reduced by the taxes on it each year.

Anything you do in business requires money, and to avoid going into debt youíre going to need retained earnings. Good question, Kim.

ó DAVE

Dear Dave,

Iím about to turn in my two-week notice after 17 years with my company. Itís a small business, and everyone is like family, but the last raise I received was 50 cents and that was 10 years ago. Iíve always worked hard and done my job well, but I need to move on to a better-paying position Iíve found. Do you have any advice on how to handle this situation?

JT

Dear JT,

Leaving people you care about is always hard. It sounds like they could have treated you better in terms of financial compensation, but things might have been just too tight. Regardless, this is a situation where you have to put yourself and your family first.

First, accentuate the positive. Let them know that your time there has been like working with family and you appreciate everything theyíve done for you. If they ask you why youíre leaving, be honest but kind. Let them know that your income wasnít changing for the better, and you have to take another position with better pay. Let them know, too, that you fully intend to honour your two-week notice unless they would rather you didnít.

It does no good to throw stones over your shoulder as you leave, JT. That kind of thing says more about you than it does about them. So just show a lot of gratitude and kindness. Itís going to be a tough situation emotionally for all concerned, so do your best to make it professional, honest and friendly.

ó DAVE

Dave Ramsey is Americaís trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven bestselling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 12 million listeners each week on 575 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

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Published Oct 29, 2016 at 8:00 am (Updated Oct 29, 2016 at 12:56 am)

Retained earnings a must for all businesses

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