From the blog Business Budgeting, Cash Flow And Taxes
Every small business is unique, but they all share one challenge: managing their finances well enough to stay in business.
Whether you open a flower shop, sell your wares online or start a new restaurant, you cannot ignore how much money comes into – and goes out of – your business, says Patricia T. Anderson, an accountant and Enrolled Agent based in Boca Raton, Florida. There are usually many outgoings, even online businesses need to invest in services like Eatel Managed Business Services to ensure things run smoothly.
“The new business owner’s biggest financial concern is cash flow,” she says.
Anderson says most businesses fail because they do not have enough cash to get them through the lean period when starting the business.
“They need to have enough cash to take care of them personally and professionally while they run and build their business,” she says.
The key to staying afloat is setting a realistic budget, and then turning that into a cash-flow analysis that ensures there are enough funds to keep the business going until it can turn a profit, she adds.
Choosing The Right Business Entity
The financial concerns don’t end there, though. For example, choosing the right business entity – such as a limited liability company or S. corporation — can make a big difference to your bottom line, Anderson says.
“Small-business owners should consult with an accountant to confirm that they are making the best selection for tax and liability purposes,” she says.
Fail to seek such guidance, and you could end up paying more in taxes than you should. This is why it would be a really good idea to involve a tax lawyer where possible, as they can deal with any complications that might come about. You can find out more about which lawyers you could use here.
Anderson also notes that many small-business owners are not aware that their tax is calculated on the amount of profit the business has earned, not the amount of cash they have personally taken out of the business.
“This can also cause cash-flow issues,” she says. “Many new business owners roll the profits back into the business to help it grow and forget to set aside funds for tax.”
The Impact Of Tax Reform
Recent changes tied to federal tax reform – formally known as the Tax Cuts and Jobs Act — also can have an impact on your new small business. Getting help from a nonprofit bookkeeping accountant could help you to keep on top of your taxes and any changes that may happen that could affect your business.
Anderson says the biggest change is the qualified business income deduction, which can provide up to a 20% deduction of qualified business income from a domestic business.
“If qualified, it could significantly reduce their tax liability,” she says. However, she adds that there are “a tremendous amount of rules and exceptions” surrounding this change.
“This new change makes it even more necessary to engage an experienced business tax preparer,” Anderson says.
Another change tied to tax reform is likely less welcome – the elimination of the deduction for entertainment expenses.
“In addition, if you treat your clients to cocktails and dinner at the sporting arena while attending a sporting event, your tickets and food and beverage is no longer deductible,” she says.
However, she notes that if you strictly take your clients to dinner for a business purpose, your food and beverage would still be 50% deductible under tax reform.
“Many clients used to track meals and entertainment in one account on their financials, but now it is important to separate the two to assist in tax preparation,” Anderson says.
Hiring Outside Help
Strong finances are the fuel that allows a business to move forward. For that reason, it’s crucial for small-business owners to view their accountant as someone who can provide help that stretches beyond mere compliance and tax work.
“In reality, they should be using their accountant’s expertise for more than just that,” Anderson says.
For example, she urges new business owners to work with their accountant to conduct a profitability and growth analysis, especially in regard to long-term plans such as adding team members and integrating new software. This also includes the possibility of opening an additional location and/or moving offices. Expanding the business is not easy and the company needs to be sure that they can support themselves during the move. Not only will they still be paying staff members, new property costs and a moving company, but they will also have a reduced income as their not operating like they usually would. Moving is a big deal, and they need to be on the same page with the accountant to make sure that they can afford it. More information about moving is available on this page.
“They should consider the cost and benefits of these decisions,” she says. “Sometimes, clients are making decisions based on their wants, but need to analyze information so they can make more informed decisions to attain their long-term goals.”
She also notes that too many small-business owners who handle their own finances do their accounting “after the fact.” By working with an accountant, they can get better access to real-time data that can help them make more effective decisions about product and service pricing, and employee salaries, she says.
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