Quarterbacking Your Tax Prep with Your Bookkeeper/Coach

Guiding your business with the skill of a football quarterback requires a clear focus. So, as the old year comes to a close, take this opportunity to think like a champion, and focus on preparing for tax time.

Quarterbacking your records

To accurately calculate the amount you need on hand for taxes, you rely on a tax professional. But that person relies on you to properly finalize all transactions in your bookkeeping records. This entails accounting for everything in a precise manner.

A chronological list of transactions won’t cut it. Rather, all entries much be correctly categorized. Personal items can’t be mixed with business expenses. You need to distinguish long-term assets from ordinary overhead costs. Everything must reconcile, as your bank balance on the books must match the bank’s statement. Profit must be offset with cash or other assets on your balance sheet. Any discrepancy must be either borrowed or money from the business distributed to you.

Your bookkeeper/coach

Your bookkeeper plays coach to your quarterback. If you don’t have a thorough knowledge of bookkeeping, find the right coach to record financial transactions. His or her duty is delivering specific information to the tax accountant after the year closes, but this starts before year-end. You can facilitate the exchange by collecting from your tax accountant a list of details needed to assess business taxes and facilitate tax planning.

You, the quarterback, working with your bookkeeper/coach, must fill in gaps in your records before sending your information to your tax professional.

Don’t Plan to Fail: Budget Planning Works

The adage, “If you fail to plan, you are planning to fail” has been attributed to Benjamin Franklin…and ignored by business owners from his day on.

Business owners offer plenty of excuses for not planning, particularly when it comes to budget planning. It’s not until failing to plan sabotages their success that entrepreneurs grasp the true meaning of the adage.

A budget is supposed to function simply. It outlines how you will pay for necessities, and expand as required. But when that budget exists only in your mind, you’ve become a virtuoso in the art of self-delusion.

To genuinely assure that your budget is sensible and meets its intended purpose, it must satisfy certain time-tested principles. That entails committing some time at year-end to scrutinizing your written budget.

Leverage points

Start by understanding the leverage points in your operations using accurate recent financial statements. Obtain from these reports the key ratios that form assumptions in your budget.

Specifically examine direct costs for business projects, such as materials and labor utilized for processing billable work. Your gross profit margin is what’s left from revenue after paying direct costs. In general, whatever revenue you predict for next year will generate the same historical gross profit margin percentage. To accomplish a different margin, you’ll have to take some action to contain costs; however, growing revenue while incurring a slower rise of direct costs will deliver an immediate benefit to your bottom-line profit.

Overhead expenses

Reliable budgeting requires a firm knowledge of general and administrative costs. Understand which expense categories are the largest. Any meaningful budget – particularly an optimistic one that predicts improvement – should reflect changes to big-dollar items. For variable costs, set an expenditure limit that’s a percentage of revenue. Your financial reports convey the historical percentages. Locking in percentages for variable expenses can be useful if and when future revenue either exceeds or falls short of expectations.

Fixed costs are the most troubling expenses. They kill profitability during an economic downturn or period of slower-than-anticipated sales. You have to pay them no matter what, and they’re difficult, if not impossible, to change once you lock them in place. Using previous financial statements, find out which fixed expenses have changed the most as a percentage of revenue. You should consider re-examining any fixed costs that are placing increasingly difficult demands on revenue. Lower rent, cheaper insurance, and reduced usage of utilities are common ways to alter fixed costs.

Taking action

Without an action plan, a budget is just a bunch of jumbled numbers that you hate to confront. What makes budgeting valuable is that it establishes a strategy for managing your business. The tactical methods necessary to attain projected revenue are merely part of your strategic planning. Only by simultaneously spending as established in your budget can you reach your profit objectives.

Analyzing expense patterns and creating realistically defensible budget allocations is tedious. But it’s better than suffering through a year of unmet intentions by not planning. Franklin would be proud.

Now is a Good Time to Talk to Your Accountant

Sound small businesses and solo operations share one factor with large organizations: the benefit of having an accountant to look over financial records, not only once a year for seasonal income tax reporting, but regularly.

The wise entrepreneur understands that an expert eye catches errors that will cloud judgments surrounding the administration of his or her business.

Uncovering what-ifs

Meeting with your accountant near year-end – before the hasty pace of tax season – is ideal for uncovering what-if scenarios, obtaining risk analysis assessment, and getting a start on next year’s sales projections based on recent trends.

This process begins with an examination of your financial transactions for accuracy. Your accountant isn’t going to judge you for your bookkeeping skills. Instead, an accounting expert aims to help you with your business management duty.

Future planning

You probably never think about the fact that the accounting business gets a little slow during November and December. In fact, you probably prefer not to think about accounting at all until it becomes absolutely necessary. However, as you plan for next year, your accountant is an ideal, available resource, who can contribute key information that is relevant to your planning.

Because the responsibility for managing data rests squarely on the shoulders of the business owner, you can’t fob off serious number-juggling to your bookkeeper. Among the possible accounting issues confronting you are: inventory, subcontractors, payroll, travel per diems, meal reimbursements, and business use of a personal vehicle. Any or all of these issues demand your personal attention.

Getting advice from an accountant about fine-tuning your accounting measures results in the accuracy needed for sophisticated actions. Your accountant can help you make an easy leap to conquering the higher-level processes, such as preparing financial budgets, assessing your financial condition relative to peers, evaluating your progress over time, and devising cash flow projections for new initiatives.

Preparing in advance

Therefore, if you want a thorough understanding of what’s happening with your business, discussions with your accountant are crucial. Prepare for the annual dialog by developing a summary of your plans for growth and a description of circumstances affecting current operations. This may include your dependency on key customers for repeat business, your referral network, or marketing system, as well as relationships with primary suppliers. Maintaining this foundation requires cash flow. Your accountant will help you see if you’re on track.

Ask your accountant what bookkeeping matters need enhancement to better uncover your financial condition. There’s always room for improvement. Let your accountant shape some new guidelines to assure that key details don’t slip through the cracks. Then you’ll need to discuss operational and strategic risks your business is facing.

Small business owners seldom specialize in analyzing and tracking data, nor do they want to. But these practices are vital to your company’s financial health. Your accountant is the avenue for attaining input similar to that of a chief financial officer. He or she can create the road map you require to stay ahead of your competition.

EBITDA Tracks the Financial Health of Your Business

If you remember only one acronym from the analysis of your financial statements, it should be EBITDA. This statistical measure stands for earnings before interest, taxes, depreciation, and amortization.

EBITDA is essentially a component of cash flow. It reveals the ability of your business to generate sufficient funds for loan payments, taxes, and growth. To calculate EBITDA, subtract your operating expenses from business revenue. A positive number means your business has enough sales to cover expenses. But you don’t count the expense categories of depreciation and amortization. These are simply the write-offs over time for the cost of capital purchases such as equipment or building improvements.

Your EBITDA is the source of money for these purchases, or for making loan payments to finance them. So you only care about the cash available to pay for these items, not when the cost is depreciated for accounting purposes. EBITDA, therefore, is a base to judge expansion possibilities and results. For example, a profitable enterprise can be cash-poor because it’s acquired too much inventory or isn’t being paid on time by customers. In either case, subtracting increases in inventory or accounts receivable from EBITDA uncovers the negative number that foretells trouble ahead.

Likewise, growing businesses usually have expenses that precede revenue. EBITDA will show whether you have enough money to put into extra travel or labor related to new projects that deliver cash receipts only in the future. Finally, don’t forget to reserve a sufficient amount from EBITDA for taxes, or you’ll have a really big problem.