As an agency owner, you cannot be successful without understanding your income statement. The most critical components of the income statement that you’ll need to pay attention to are taxes and interest. Properly estimating your state and federal income taxes every month will keep you ahead of the game. Not only will you avoid any nasty surprises come tax time, the full picture of your business will be accurate from month to month. Factoring in the projected interest on any debt payments will also ensure you understand the true cost of your debt, and are accurately planning to accommodate for it. In this blog post, we’ll dive deep into taxes and interest and why they matter for your business.
Taxes: A Crucial Component of Your Income Statement
The first component of your income statement you need to understand is taxes. As a business owner, you need to estimate your state and federal income taxes every month to ensure that you are putting enough cash aside. Doing so gives you a true picture of your total profits, without having to wait till the end of the tax year. With this information in hand you can make the best decisions for your business year-round, rather than guessing and checking at the end of tax season.
We generally recommend targeting 35% of your operating income for taxes. If you have an LLC or an S corporation, your business does not have to pay state or income tax. However, we still recommend estimating your taxes so that you know how much cash you need to set aside to pay personally.
Interest: Estimating and Projecting
Another crucial component of your income statement is interest. You need to project what you will pay, by month for any interest you have on any debt payments. This will help you understand how much you will need to pay in total interest over the course of the loan. The projected interest will also enable you to calculate your net income accurately.
Calculating Net Income: Your Actual Profits
Once you have projected your taxes and interest, you can calculate your net income. This is your operating income minus the total for taxes and interest.
Net Income= Operating income – Total of Taxes & Interest
Net income is a crucial number because it’s your revenue minus all of your expenses. Having this number will give you the best idea of how much cash you have left over from operating the business.
In conclusion, taxes and interest are critical components of any income statement. As an agency owner, it’s essential to estimate your taxes and interest every month and project them over time. This will give you an accurate picture of your profits and help you make informed decisions. Don’t forget to work with a tax accountant to ensure that you are factoring in all of the relevant taxes and interest correctly!
By maintaining accuracy in your income statement, you will set yourself and your business up for long-term success.