Day 2:
Thursday, July 10

Presenter:
Elizabeth Mance


Many business owners mistakenly lose focus on the “numbers,” until it’s time to pay their yearly taxes. Tax returns, however, do not necessarily represent the true financial health of their company.

Tax returns represent only a slice of your real financial picture. Below are reasons why you should not focus solely on the results of your tax returns:

1. The recognition and measurement of income and expenses are vastly different among businesses based on entity type, tax guidance, and management decisions. Therefore, two similar companies could have very different tax outcomes.

2. Tax returns are prepared in compliance with IRS and State taxation codes. The numbers on your tax returns are adjusted to fit into those guidelines and do not follow generally accepted accounting principles. If tax returns provided a true picture of a company’s financial health, then publicly traded companies would need only to provide stockholders with copies of their tax returns!

3. Your tax return takes into consideration tax deductible items only. For instance, your business may have incurred health insurance premiums which may not be tax deductible. Also, many business meals, client appreciation, and auto expense deductions are reduced, therefore, inflating profits for tax purposes.

4. You lose month-to-month comparisons of key metrics, including checkpoints on your business plan. By becoming aware of these fluctuations, you will have the time to investigate the drivers of these changes, if they are not evident.

5. Your accountant typically completes your tax return 15 to 20 months after the start of the year. By waiting for your tax return to implement changes, you lose precious time. In our fast-paced market it is essential to address business problems when they arise, not a year and a half later.

6. Tax returns don’t give the reader comparative financial ratios. And, they don’t provide you with the numbers needed to generate these ratios:
a. Profitability Ratios - these offer different measures of the success of your company’s ability to generate profit.
b. Liquidity Ratios - these measure your company’s capacity to pay its debts as they come due.
c. Leverage Ratios- these provide an indication of the long term solvency of your company.
d. Operations Ratios - these evaluate how well your company manages its assets.

7. At some point you may need to apply for a line of credit, or finance an expansion or major purchase. Your banker will need past and current copies of your Balance Sheet, Income and Cash Flow Statements.

These are seven strong reasons why you should focus on your numbers more than once a year at tax time. To get a true understanding of the health of your company, look and learn to understand your finances on a monthly basis!

More about Elizabeth

Elizabeth Mance is the owner of Accountability Services - www.accountabilityservices.biz - a full-service accounting and outsourcing firm that offers an innovative approach to each client’s particular needs. “Our mission is to provide the small and mid-size service company with high-level financial solutions at an affordable rate. Unlike traditional accounting firms, we take an integrated advisory approach–looking at the whole system, not just the accounting basics–offering a coordinated set of services, ranging from traditional accounting to associated business and financial consulting.”

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