Dave Says Column

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Retained earnings are a must

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 though. You’re talking about running a business, making a profit, feeding your family, and saving money in the business. This isn’t an easy process no matter how long you’ve 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 doesn’t have to be a big percentage, but you should be setting money aside every month for the company.

The beauty of doing this is you’ll have money sitting there to replace equipment and other expenditures down the road. Just remember that it’s all taxable. Whether you’re in an LLC, Sub S Corp or sole proprietorship, any money you make as profit — whether you take it home or not — 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 you’re going to need retained earnings. Good question, Kim!
—Dave

Be professional

Dear Dave,
I’m about to turn in my two-week notice after 17 years with my company. It’s a small business, and everyone is like family, but the last raise I received was 50 cents and that was 10 years ago. I’ve always worked hard and done my job well, but I need to move on to a better-paying position I’ve 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 they’ve done for you. If they ask you why you’re leaving, be honest but kind. Let them know that your income wasn’t changing for the better, and you have to take another position with better pay. Let them know, too, that you fully intend to honor your two-week notice unless they would rather you didn’t.

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. It’s going to be a tough situation emotionally for all concerned, so do your best to make it professional, honest and friendly.
—Dave

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