This year's tax season is over; most of our business client returns have been filed or are on extension. Based on our experiences in working with clients, we ask this simple question: Do you know where your small business stands? Tax problems seldom sneak up on those who are vigilant about controlling their affairs.
Do you know the answers to the following questions?
1. What is your profit at midyear?
2. What is the net worth of your company?
3. Which was your best month?
4. Which was your worst month?
5. As a whole, is your small business becoming more profitable?
6. Is there any activity within your small business that is more profitable than the rest?
7. What activities within the business are not profitable and causing you stress?
"What if I don’t have the answers to those questions?"
Use your QuickBooks® software to run monthly and quarterly reports and do some analytical work to see how you are doing. If you have prepared a year to date profit and loss report by month, then you can easily answer Questions 1-5. Or at least easily answered until you start asking why. Why was April so good and May so bad? Was it increased revenues or decreased expenses that made April so good? Did you do a special mailing or try a different means of marketing?
The balance sheets accounts are also important; especially Accounts Payable and Accounts Receivable. If either one is drifting upwards then you have to wonder why. Your credit policy may be getting sloppy; you may be starting to allow bills to drift. Maybe there is nothing wrong. You may have landed a big account and have not received payment. The result may be that you will always have large accounts receivable at the end of the month followed by large receipts at the beginning of the following month. The point is that at least you know where you are and can work to improve your small business.
Answering Questions 5 and 6 may be more difficult because you most likely have not organized your books to capture the data. This happens because people think that their businesses are simple, when in fact, they are complex.
Take, for example, a landscaping business where, during the year the proprietor mows lawns, does spring and fall cleanups and plows during the winter. Assume that he were to refine his revenue and expense accounts so as to account for each activity he might discover some startling results. Is snow plowing profitable? Are we at a point where the cost of maintaining our lawn mowing equipment is more than buying new and better equipment? Do we really make money on cleanups? Is the real money made in doing landscaping assignments? Would we make more profit by four crews instead of three?
It's vitally important to have a handle on your businesses finances. Every big payroll tax problem starts out small.