7 Accounting Tips for Surviving Tax Time — And Thriving Anytime
The New Year’s celebration is long over. The ball dropped, crews cleaned confetti from the streets, and now we’re all sobering up to the realization that it’s tax season.
While taxes are an annual “tradition” at every company, one survey found that 71 percent of companies outsource tax preparation — and another 30 percent outsource tax planning. In many cases, business owners are effectively ignoring their budgets, accounting, and finances until tax season rolls around.
Considering how rare it is to find a business owner who reviews financials throughout the year, a dedication to the numbers can easily give you a leg up on the competition. Financial forethought drastically reduces the work necessary during tax time, but more importantly, it provides valuable insight into revenues and expenses throughout the year. It’s not uncommon for subtle price increases to fly below the radar, cutting into profits without anybody noticing.
My firm previously worked for a media company that had no audit trail, no backups of previous returns, and a shocking lack of information from the past few years. We were able to help the company reconcile the situation, but it ended up taking far more energy than it would have if the company had done things correctly in the first place. These stories are surprisingly common, but they’re entirely avoidable with a little time and proactive effort.
Making Record-Keeping a Priority
Sales are the lifeblood of any business, and it rightfully tends to be companies’ primary focus. While it’s certainly important to bring in the money, non-accountants don’t always recognize that keeping track of finances can also drive revenue.
Imagine you have a booming business selling cookies. The price of chocolate chips goes up during the summer, but you don’t notice because you were selling so many cookies that your only focus was baking. This price increase cuts into your profit margins, though, which means you’re making less profit from each sale.
Had you noticed the increase at the time, you could have raised your prices accordingly or put fewer chips into the batter to balance things out. You could even have tested new flavors with higher profit margins, such as gingersnaps or snickerdoodles.
While careful accounting might not have the same flair as sales, a watchful financial eye can benefit your business in powerful ways. Rather than neglecting your financials until tax season comes calling, it’s imperative to be mindful of your money all 12 months of the year.
When a tax preparer must unravel past tax returns in addition to this year’s finances, things get messy. It’s even more complicated when payroll details such as who is an independent contractor and who is a full-time employee aren’t as clear as they once were. Each situation has different tax consequences, and mislabeling can have dire legal repercussions for employers and employees alike.
Organized accounting saves a lot of headaches, so it’s important to get started early and use experts who have been through similar situations before.
7 Steps to More Organized Financials
While finances can seem complicated, it’s relatively simple to keep your ducks in a row. No matter how busy your company gets, follow these seven steps to stay on track.
- Keep the lines of communication open.
Open communication between all facets of a business and a tax preparer is vital. This isn’t just a one-time deal, either. Work to involve your tax preparer throughout the year, ideally engaging him or her at least once every quarter.
You could also take this task off your plate entirely by connecting your tax preparer directly with your bookkeeper or accountant. Tax season shouldn’t be the first time these two have spoken to each other in the last 365 days! Ongoing communication mitigates potentially disastrous mistakes and provides ongoing insight into how your finances will affect your taxes — as well as what steps you can take to decrease your liability.
- Stay on top of accounts receivable and accounts payable.
By the end of the year, you should know exactly how much money you’re owed and which bills are outstanding for various departments. In fact, this information should always be readily available to department heads. Cash flow is critical for businesses to remain operational; just imagine trying to pay your tax bill without knowing whether you have the money on hand (or whether you’ll have it in the next week or month).
- Keep stock of your inventory.
Accurate records of any physical inventory are absolutely essential. Whether it’s products for sale or business equipment such as computers or printer paper, your books should accurately reflect your inventory. In a perfect world, companies would do this on a monthly basis. If you’re not there yet, you should try to reconcile your inventory cycle counts at least once per quarter. When choosing an inventory software package, make sure you’re able to pull perpetual inventory reports.
- Verify and send out tax forms.
It’s important for all vendors, contractors, and employees to have proper contact information on file. This ensures W2s, 1099s, and other tax forms are sent out in a timely manner — your employees and contractors need these before they can file their personal taxes! Your payroll system should include this functionality, and it’s important for your human resources department to verify this information at the end of the year so taxes can be filed accurately and efficiently.
- Prepare for tax season by closing your books.
Your books for 2017 must be closed before you can review the year’s financials. This means your bookkeeper should already have full-year financials with reconciled bank accounts, credit cards, spending accounts, and any lines of credit. Whether it’s good or bad, you need to present an accurate picture to your tax preparer.
- Review all KPIs.
It’s important to consistently review key performance indicators to keep a finger on the pulse of your company. Monthly performance reviews can motivate departments to course correct or continue doing a great job. Meanwhile, these statistics can help you forecast and identify performance trends. When combined with accurate profit and loss statements, you can gain a full understanding of how your business is performing and what you can do to improve operations.
- Develop a budgeting habit.
Once you’ve compiled the above information, you’ll be able to both tackle your taxes and accurately budget for the upcoming year. Once you’ve created a budget, don’t simply forget about it. Check in every month to see how your performance is measuring up to your expectations. If your projections and actuals are completely out of whack, it’s time to look at the assumptions of your financial model and adjust accordingly. By comparing what you thought might happen and what actually occurred, your company can learn a lot!
Data is everything in the modern business world. It guides our business decisions, confirms assumptions, allows us to quickly react to market changes, and provides the basis for a deeper understanding of how best to serve our clients. If you’re not compiling and reviewing your company’s financial data at least monthly, you’re sabotaging your company.
A strong CEO needs to understand the numbers every day of every year. Scrambling to compile everything at tax time is a sign that you haven’t been keeping up with your business. If you’re not already tracking this data, there’s no better time to start than today.
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