Although tax season can be a painful time for small business owners, it does give them an opportunity to reassess how they run their companies. Whether it’s how they keep their books, or how high their expenses are, they’ve probably discovered during the course of working on their returns that some changes are in order.
Cash flow is one of the biggest problems that owners discover at tax time. Many find they don’t have enough funds on hand to pay their tax bills, and they have to scramble to come up with the money.
Gregg Wind, a certified public accountant with Wind Bremer Hockenberg LLP in Los Angeles, said a cash flow crunch is particularly a problem for new businesses.
“They’re treating cash as 100 percent usable, when they should be saving money for taxes,” Wind said.
Some small business owners regard all the profits as their own compensation, but aren’t looking out for contingencies. Wind suggests owners draw a salary out of their companies’ profits, but leave money with the business to be sure they can cover their taxes.
A cash flow shortage can also result from poor accounting. Many business owners find at tax time that their books have mistakes and omissions that, when corrected, result in less available money than they expected.
The solution to that problem involves doing a bank reconciliation, which compares the information in the company’s checking account with its books. A bank reconciliation should be done monthly; if not, you really don’t have a handle on your firm’s finances. At the very least, it must be done at year’s end so you don’t encounter any unpleasant surprises in March or April.
Wind noted that accounting mistakes can skew a company’s net income, and affect its tax bill.
If you’ve found problems in your books, then you need to rethink how you’re keeping them. If you’re trying to do it yourself but don’t have the time to do it carefully, then you need to get some help. If you’re not using software to keep your books — it’ll help with the bank reconciliation, too — then going high-tech might be the answer.
Many small business owners are chagrined at tax time to realize that their expenses are way too high.
Of course, expenses can be an owner’s friend, because those that are deductible will reduce a company’s tax liability. But the truth is, tax savings don’t make you whole — you’re always paying out more than the government will give back to you, and lowering your expenses is really the best way to save money in the long run.
For many business owners, the angst that tax season brings is another reason to change the way they operate. Do-it-yourselfers are often squeezed for time, and find themselves wishing they’d handed their returns over to a professional. Others, finding that their tax bill was unexpectedly high, end up sorry that they hadn’t gotten some financial advice during the course of the year.
Accountants preach the importance of year-round tax and financial planning as a way to prevent such regrets during tax season. Wind’s suggestion is to meet with a tax professional at least twice a year — at midyear and then again toward the end of the year — to be sure your business decisions, finances and books are on sound footing.
“If you keep up with it, it’s really not too onerous,” Wind said. “It’s when you get behind that it’s difficult.”