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How can I have a profit when I have little or no money in the bank?
Your checkbook balance rarely, if ever, has any relationship to your profit or loss. Not everything spent is a business deduction. For instance, personal expenses paid out of your business checkbook do not show up as an expense. Neither does the purchase of any assets, even when paid in cash.
Business owners who are not familiar with their financial statements and what actually affects the bottom line are usually quite surprised to find they owe taxes at the end of the year. Even more so if they don't have the cash to pay their taxes.
The best way to not be surprised is to review your financial statements with your financial advisor once a month to see where you stand.
Why must I have a financial statement prepared in order to have my taxes done?
We're all used to just bringing in a few pieces of paper to have our personal tax returns done. You usually just have W-2s, 1099s, a few receipts and it's no big deal. However, business tax returns are quite different.
In order to take full advantage of all tax deductions and to make sure that everything is accounted for, your financial statements are the best source. The bank accounts must be reconciled and source documents are needed for every item on your Balance Sheet, such as bank statements & reconciliations, credit card statements, note balances, etc. Accountants have a saying, "If the bank balance isn't right, nothing else is right."
There is an IRS form (Form L for corporations) for every entity (except Sole Proprietorships) where the Balance Sheet is listed with beginning and ending balances. Then, your income and expenses are on other forms. While you can have just a Profit & Loss, you really don't know if it's accurate without the Balance Sheet.
Why should I have my books done on a monthly basis?
Most often, the bookkeeping "chores" are considered to be low priority because it is a non-income producing activity, much like filing. However, this is the very area that can be a business' downfall. Not knowing how your business is doing financially and what taxes you will likely pay is your greatest weakness. Many owners don't even know what their checking account balance is.
While many owners just "keep track" in their head, there is nothing like looking at real, solid numbers. Let me give you and example...
While working for a title company, the escrow officers had regular sources of closings form local banks, attorneys, realtors, etc. There were some who were considered a real pain to work with and the officers wanted to direct their business elsewhere. There was one officer who kept threatening to quit and take a regular customer with her because he followed wherever she went and he was considered to be a top-producing customer. So, the company president asked me to prepare a report showing who our top 10 income-producing customers were. She also requested that I ignore walk-in and repeat customers.
While I put the report together, I included the walk-in and repeat customers anyway because I was pretty sure they were fairly close to the top 10. What a surprise that report was to everyone! In the top 10 customers were the ones the officers complained about the most! Also in the top 10 were the walk-in and repeat customers! Not even close to the top 10 was the personal customer of the officer who kept threatening to quit.
Don't you know that the marketing for the company changed? Yes, they learned that they either needed to create better relationships with the customers they were complaining about, or cultivate more revenue from someone else. The officer who kept threatening to quit no longer had any leverage. And the customer at the bottom of the 50-plus list? He was the one who required a lot of time and energy being catered to. Guess who they stopped paying attention to?
So, having your books done and making sure that you review your financial statements on a monthly basis, if not more often, may tell you some surprising things about your business that you didn't know. How empowering would that be?
Why should I pay someone to do my books for me?
Many small businesses begin with the owner taking care of their own books out of necessity. But, there comes a time when you should turn your books over to professionals. People try to apply normal everyday logic the their accounting, however, that logic doesn't necessarily apply to accounting principles or to what is tax deductible.
Paying a qualified bookkeeper or accountant to work on your books can pay for itself, not only in what you might save in taxes, but in quality financial information that will provide you with what you need to make business decisions that will keep you in business. Plus, it frees up your time, allowing you to concentrate on building your business.
A CPA is a CPA. What difference does it make who I use?
You would be surprised! CPAs cannot possibly know everything about everything in the tax world. If you are building a real estate empire, then you better have a CPA who is an expert at real estate accounting and taxation. There are special rules, that when followed, give you a bigger tax break. The same applies for many other industries. If you need to use GAAP accounting, not all CPAs will provide that service.
A CPA may be ultra-conservative or so non-conservative that they border on illegal, to anywhere in between. There are CPAs who are only interested in getting your tax return done, but don't help you focus on what your financials are telling you. Your CPA may not communicate well with you. Also, just because they are licensed doesn't mean they know what they are doing.
Choosing a CPA may mean interviewing several before deciding which one is best for you and your company. As your business grows and/or changes, you may also find that while your CPA is great, they can no longer provide you with what you need. Sometimes, you have to change CPAs in order to grow you business, and they understand that.
Choose your CPA wisely and don't let them just make decisions for you. It may not be what you intended and could actually hinder your objectives. Your CPA should take your entire financial life into consideration before making suggestions, answer your questions until you understand what they are talking about and give you options.