Profit is about get the minimum expenses. You may think that making profit is the aim of every business owner. But the fact is actually not as simple as that. The business’ profitability gives direct impact to your business financing. So why are many small business not showing profitability?
Cash Flow Positive and the Profitability
If your business is categorized in the positive cash flow, that means your business have more cash that flow in the saving than the amount of cash that flow out during certain period. You may think that this is profitability, but that’s not actually it is. Even though the profit and loss statement can define that your business is quite profitable, the lenders will only take a look of your tax returns for the purpose of the profitability. There are possibilities that may happen. Your tax returns are the important thing of financial documents. Those are what you show to the government, so they are more legitimate. Your cash flow depends on how your cash is going in or out in the same period of time, while your profitability is depending on what your tax returns show.
Cash Flow Positive and Negative Profitability
Although your business is cash flow positive, but your tax returns still possibly loss a net. It is because of the other compensations, expenses of interest, other costs, etc. These make your income get lower. But they don’t need payments in cash, so your tax returns tend to have loss. The benefit is the loss can reduce the income of your business and also the taxes of the income.
To get the profitable tax returns is really interesting, and especially if you exactly know that you need quick financial source for your business. But there are some things that you need to consider.
Some lenders will add back things on your tax returns, such as the depreciation, the officer compensation, and the interest expenses. These are needed to see if you are truly deserved and profitable over what you have proposed on your tax returns. It’s important to know that some lenders perhaps have this policy, but you can’t generate it to all lenders. The other may have different policy that you still need to know. Make sure that you have truly understood of the add-back policy before proposing funding, so you won’t regret anything.
The lenders who agree with the short term loans like the equipment financing usually don’t look for the profit from your tax returns. They are more attracted to your credit scores, your annual income, and business duration. Lenders that still use the term loans traditionally will care much more about the profitability from your business.
The kind of financing that you are looking for and what kind of lenders that you would cooperate with will affecting on how you need to get the profit on your tax returns. It is totally depending on your needs, you may have other things to consider before looking for loan profitability.