It’s that time of year again! In this episode, host and CEO of Kickstart Accounting, Inc., Danielle Hayden, dives into the topic on every business owner’s mind toward the end of the year—bonuses—a perfect way to celebrate and reward your team’s hard work! With Danielle’s easy 5-step framework, she’ll walk you through how to structure bonuses thoughtfully, so you can show appreciation while keeping your business financially strong. Get ready to learn practical, step-by-step strategies that will help make rewarding your team a stress-free, financially savvy experience!
Key Takeaways:
- Determine Profitability: Only consider bonuses if your business is profitable, verified by examining the year-to-date net income.
- Check Cash Reserves: Ensure that sufficient cash is available to avoid cash flow issues. Ideally, set aside funds throughout the year to prepare for bonuses.
- Allocate a Bonus Pool: Danielle recommends distributing 10% of net income as a guideline, though this depends on your business's performance and goals.
- Identify Eligible Employees: Assess eligibility by listing all employees and evaluating their tenure, alignment with company values, and overall performance over the year. She suggests categorizing performance levels (exceptional, meets expectations, or below expectations) to ensure fair distribution.
- Plan the Timing: Choose when to pay bonuses based on tax strategy. Paying before year-end counts toward this year’s expenses, while paying afterward counts toward next year.
Topics Discussed:
Introduction to Team Bonuses and Financial Stability (00:00:00 - 00:00:51)
Framework Overview for Bonus Distribution (00:00:51 - 00:01:25)
Step 1: Determine Year-to-Date Net Income (00:01:25 - 00:02:45)
Step 2: Check Cash Balance (00:02:45 - 00:03:27)
Step 3: Decide Bonus Pool Amount (00:03:27 - 00:04:09)
Step 4: Identify Eligible Employees (00:04:09 - 00:06:28)
Step 5: Importance of Timing for Tax Purposes (00:07:30 - 00:08:47)
Summary of Bonus Distribution Framework (00:08:47 - 00:09:55)
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Episode Transcript
00:00:00:00 - 00:00:20:07
Danielle Hayden
Today's episode, we're going to be talking about a topic that is on so many business owners' minds. At the end of the year, we're talking team bonuses. As a business owner, paying your team bonuses can be a great way to show appreciation and really reward hard work at the end of the year, but it's important to do this the right way.
00:00:20:12 - 00:00:51:26
Danielle Hayden
As a CEO, you are responsible to ensure that your business remains financially stable and that bonuses are distributed fairly and strategically. Welcome back to business by the books, where we break down financial strategies to help business owners like you make smarter decisions. I'm Danielle Hayden, your host and CEO of Kick Start Accounting Inc., where we help business owners get clear on their numbers through bookkeeping so they can grow their business with confidence.
00:00:51:27 - 00:01:25:14
Danielle Hayden
Today, we'll be walking through my method as a CFO and CEO for determining year-end bonuses in a way that aligns with your profits, your cash flow, and your company's values. So if you're wondering how to reward your team without jeopardizing your business's financial health, this episode is for you. Now you all know how I love a framework, so we're going to go step by step through this framework to determine the exact number that you can use to pay out your team bonuses.
00:01:25:15 - 00:01:57:13
Danielle Hayden
So step one is to determine your year-to-date net income. This is a non-negotiable. You should only distribute bonuses if your business has generated a profit and has cash on hand to support it. I have seen so many business owners feel pressure to offer bonuses simply because it's the end of the year, or because it's become company tradition, but remember, you cannot and should not distribute money that you don't have.
00:01:57:16 - 00:02:21:08
Danielle Hayden
As a business owner, it's easy to get caught up and wanting to reward your team, but it's critical that you have a clear picture of your financials before making any decisions. So step one is to pull up your profit and loss statement directly from your accounting software, and look at your net income to ask yourself, is my business profitable this year?
00:02:21:13 - 00:02:45:22
Danielle Hayden
If you have had a rough year and there are no profits, then bonuses will need to wait until next year. You can't put your business at risk by spending money you don't have. Now, if you are a Kickstart Accounting, Inc. client, I want you to open your last month's snapshot and scroll to the bottom of your snapshot. You will see your year-to-date net income right there, plain and simple.
00:02:45:22 - 00:03:07:02
Danielle Hayden
So you know if that number is positive, you have a profit. And if it's a loss, you need to skip bonuses until next year. Step two is to check your cash balance. Once you've confirmed your business is profitable, you need to check your cash balances. Ideally, as a cash management strategy, you have been saving and planning for bonuses throughout the year.
00:03:07:07 - 00:03:27:16
Danielle Hayden
So this means that you are setting aside a portion of your revenue every month so that when it comes time for the end of the year, those funds are there and ready to go. If you have planned ahead and you have been saving, then you'll be in a great position to be able to reward your team without putting your cash flow at risk.
00:03:27:18 - 00:03:46:21
Danielle Hayden
If you did not do that this year, let's check your cash balance to see what we can do and start planning on those transfers on a regular basis next year. All right. Step three. We need to determine the amount that's going to be distributed. We don't want to take the whole net income or our whole cash balance and distribute it amongst our team.
00:03:46:22 - 00:04:09:23
Danielle Hayden
A good rule of thumb that I like to use as a CFO is 10% of your net income can be redistributed to the team as bonuses. This might vary depending on your business's performance or what your goals are as a business owner. However, I like to use the rule of thumb of 10% of your net income goes back to bonuses.
00:04:09:29 - 00:04:38:07
Danielle Hayden
So, for example, if your net income is $100,000 and you've decided to use this 10%, that means you'll take $10,000 and distribute those dollars out to your team for bonuses. Step four is to identify who is eligible on your team for bonuses. Now here's what I suggest you do. I want you to list out every single one of your employees, and then you're going to collect any of the applicable data on those employees.
00:04:38:08 - 00:05:05:26
Danielle Hayden
Now, if for you one of your core values is loyalty, then length of service is going to be really important to you. Your business and this decision. So you really want to factor tenure into the bonus calculation. Now that might not be a core value for you. You might have something else that's a core value. So I want you to collect any information that aligns with your business's core value, and list that information out next to each employee's name.
00:05:05:27 - 00:05:28:12
Danielle Hayden
Then you're going to factor in performance. Now remember when you're thinking about performance this isn't the employee's performance over the last quarter. We don't want to be shortsighted. We really want to think about what has been this team member's contribution to the business over the entire course of the year. I have three metrics exceptional meet expectations and below expectations.
00:05:28:15 - 00:05:59:02
Danielle Hayden
Exceptional means that that employee consistently goes above and beyond exceeding your expectations of that individual and their job. Number two is meets expectations. This employee has done a solid job. They come in, they fulfill their role, and they fulfill their responsibilities as expected. Now below expectations is an employee who might be in need of a performance improvement plan or an action plan in the future.
00:05:59:04 - 00:06:28:05
Danielle Hayden
If they are below expectations or currently on an action plan or a performance improvement plan. I would suggest that this employee not be factored into the bonus pool that you have available for your employees. Now, by grading your employees based on these categories, you will be able to create an equitable distribution process amongst these employees, allowing you to reward those employees who have gone above and beyond.
00:06:28:06 - 00:06:54:10
Danielle Hayden
While adjusting the bonus amounts for those employees who might need improvement in the future. A quick break before we dive back in. If you're an entrepreneur ready to streamline your financials, Kickstart Accounting has the solution. Our proven bookkeeping services are designed for entrepreneurs like you to provide clear, accurate financial records, giving you time to focus on growing your business.
00:06:54:11 - 00:07:30:16
Danielle Hayden
Book a discovery call at Kickstart Accounting incumbent or click the link in the show notes. Let's get your finances in order so you can scale with confidence. Now back to the show. Lastly, we need to decide on the timing of our bonuses. This is really important for your taxes. So most listeners and most of our clients are on what we call cash basis financial reporting, meaning that the day that the income hits your account, it is considered revenue or sales.
00:07:30:17 - 00:08:01:00
Danielle Hayden
The day that the cash leaves your checking account is a day that we consider an expense to the income statement. So we consider those dollars spent. We consider that an expense on the profit and loss statement the day that the money comes out of your checking account. Now, if you want to lower your net income for this year, and you want bonuses to be part of the tax equation for this year, we need to pay out bonuses before 1231.
00:08:01:00 - 00:08:23:11
Danielle Hayden
If you want the bonuses to be included in next year's tax calculation. Let's say you have had less net income this year, and you really want to push that expense to next year. You are expecting a more profitable year next year. We want to push that expense to next year's tax equation. Then we want to pay the bonuses after 1231.
00:08:23:12 - 00:08:47:22
Danielle Hayden
If in previous years you have done the bonus payments in January, then you'll want to be consistent. Continuously paying your bonuses in January-February timeline for the tax benefit to be had each and every year. So the time that the bonuses are paid is going to contribute to when that expense is going to be deducted from your net income.
00:08:47:22 - 00:09:17:06
Danielle Hayden
So in summary, our framework includes determine your net income year to date, check your cash balances to determine the amount of cash you have available for your bonus pool. Determine the amount that's going to be distributed. I recommend using 10% of your net income only if you have enough cash to support those bonuses to be paid, plus, the taxes that will need to be paid.
00:09:17:12 - 00:09:55:26
Danielle Hayden
Then you will identify the bonus-eligible employees and collect any important information on those employees. The information is to help you determine how you will allocate the bonus pool to each individual. Lastly, determine when you will pay out the bonuses, whether it be this year or next year, by talking to your money team. Don't forget to communicate your bonuses to your team and collect the taxes for those employees so they are not stuck paying the taxes on their tax deadline.
00:09:55:28 - 00:10:20:09
Danielle Hayden
I know that's a lot. It's a lot of really big decisions. Your money team is here to help you. We love working with our clients to determine the amount that can be spent on bonuses to determine the tax year in which to pay out bonuses. That is why our bookkeeping and tax team is here to help you as a business owner.
00:10:20:10 - 00:10:43:12
Danielle Hayden
Contact your money team to help you walk through this strategic decision. If you don't have a money team yet. I encourage you to go to Kickstart Accounting Inc. dot com and book a call. Our team would love to be a resource for you for your bookkeeping and your taxes. All right, until next time. I hope you enjoyed today's episode of Business by the Books.
00:10:43:12 - 00:11:15:01
Danielle Hayden
Don't forget to hit like and subscribe! This is the number one way we can help other entrepreneurs find this podcast, cause here at Kickstart Accounting, Inc. it is our mission to help entrepreneurs understand their numbers, get access to this information, and grow and thrive in their business. So please help me help other entrepreneurs understand their numbers so they can finally grow and thrive.