We're now on our final lesson! Chapter 4 taught you how you can evaluate a project using ROI and budgets. However, a wise manager will never make a decision on a pre-tax basis. Let us learn to use the After-Tax Mindset daily in business decisions.
When a department manager pitches a new idea to the CEO, let's say a new software product, he always highlights how much profit it will bring in.
"This new software will generate $50,000 in profit!" the manager says.
However, the CEO understands that $50,000 is not exactly what it seems. The government is a silent participant in every profitable venture. If the corporate tax rate is 30%, the government would get $15,000 of that profit. The project is only worth of $35,000 to the company.
To assess any project, budget, or investment accurately, you should always calculate the After-Tax Cash Flow.
\[ After Tax Profit = Pre Tax Profit X (1 - Tax Rate) \]Why this matters: Imagine you have to choose between two investments.
If you only look at the pre-tax numbers, Investment A looks better ($10,000 > $8,500).
But let's apply the after-tax formula:
By going after-tax, you realize that Investment B is actually putting more cash into the company's bank account. Always focus on what you get to keep and not on what you make.
Congratulations! You have mastered the Finance for Non-Finance Professionals course! As a result of this course, you are now well equipped to read a balance sheet, manage cash flow, analyze ratios, build budgets, and understand the basics of corporate tax. You are now more than just a manager; you are a strategic business leader. Let's complete this very last exercise of yours!