If you think finding out your refund amount is the biggest piece of information you can get from your tax return this year, we have news for you. Getting your books tax ready should give you a whole heap of information you can use to help run your business..
Here are four things you should look at when you get your taxes done to help determine the health of your business (hint, they’re all on the Balance Sheet):
Your assets are what your company owns. You’ll want to see how your assets compared to the previous period, or even this time last year. A lot of businesses have their cash tied up in inventory. How often are you having to get new inventory? What’s the lead time? And if you didn’t have another penny coming in, how long would you be able to stay in business? Knowing the answers to these questions should help you when making decisions about spending your cash on hand. If you have six months worth of stock left, and you only need two months lead time, you can stand to use your cash for things like new equipment or potentially bringing on help. Knowing your numbers can be the key to growth for a small business
2. Accounts Receivable
If you have accounts receivable, this could be an area that’s very telling for your business. This will tell you if people are paying, and if not, how behind they are. No one wants to make collection calls. But now there are automated solutions out there to help solve the problem before you pick up the phone. Even some accounting software offers automated invoice reminders. When an invoice is getting close to due, or overdue, the software sends your customer on automated reminder. This can not only help you get paid faster, it can also reduce the amount of unpleasant phone calls you and your team have to make. Working with an accountant or bookkeeper can help you find a solution so you’re not surprised at tax time when your profits are still outstanding.
3. Fixed Assets
Remember earlier when we talked about buying new equipment for your business? That’s considered a Fixed Asset. So are things like your building, if you own it, furniture, and vehicles. These assets depreciate the longer you have them, meaning they’re worth less, and therefore less of a tax write-off. If you have assets that are fully depreciated, there could be an advantage to replacing them with new assets to gain additional depreciation which is a non-cash write-off. If a new piece of equipment could also increase your efficiency, you could be looking at a double whammy. Both more of a write-off, and a cost savings in your business. The key thing to know with your fixed assets, if that if you’re looking at them on your tax return and realizing you needed to buy new, it’s already too late for that year. Your financial professional can tell you when to buy assets to be sure you’re capitalizing on your deductions.
4. Accounts Payable
This should tell you everything that’s owed within the next 60 days or less, depending on the terms that were negotiated. It’s important to have enough cash to cover what’s owed. You’re also going to want to focus on the current ratio of current liabilities versus cash, accounts receivable and inventory? You’ll also have long term liabilities, things that are owed beyond the current 12 month period. If you’re paying interest you should make sure it shows up as an expense on your Income Statement as it’s tax deductible. This is where it gets interesting, after you’ve looked at all your money coming in and going out, everything that’s left is your equity, or what your business is worth on paper. If you’re looking for funding, or potentially want to sell, this is a key number to know. It can also help guide you as to how much you want to continue to invest in your business.
Bottom line, if you’re paying for tax prep, but only getting a basic summary of money in versus money out, you’re missing out on a lot of information. Talk to your tax prep professional about getting a more in-depth look at your business. Or better yet, work with a bookkeeper year round, especially one that understands your industry. This way you can get real-time financial information so you can make weekly or monthly decisions to better your business, rather than just relying on one report at the end of the year.
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