If you’re just getting started in business, you have a lot of things to do. If you don’t make sales, you don’t have a business. Plus you need to fulfill on those sales or you won’t be in business very long. You’re watching cash to make sure you have enough. Often, the last thing you’re thinking about is accurate financial statements for your business.
And then it’s tax time. If you don’t have a financial statement, you won’t have accurate tax planning and at tax time, we might have a conversation something like this.
Taxpayer: “I don’t have to worry about taxes this year.”
Me: “What does your Income Statement show for income?”
Taxpayer: “I’ll get to that someday. But I know that I don’t have taxes because there is no money in the bank account.”
True or not true?
Well, the answer is “it depends.”
The problem with this idea is that there could be no money in the account for a lot of reasons. And most of the reasons have absolutely nothing to do with how much taxable income you have. For example, the following reduce cash, but do NOT reduce taxable income:
- Purchase of something that isn’t deductible
- Buying inventory or another asset
- Paying down debt
- Taking out money for personal use
You may have no cash in your account, but owe a lot of money in taxes! How can you know what is right? There is only one way – an accurate and timely financial statement.
And even if your business has great books and records for tax purposes, you might be missing out on one of the top secrets successful business owners know. Your business’s financial statements tell you the past, present and future of your business. And if you don’t know how to read that now, your business is never going to be as great as it otherwise could be.
There are two types of financial statements you should have for your business:
- Accrual-basis. You need accrual-basis statements to make good decisions about your business. The accrual basis will include accounts receivable and accounts payable, which are key leverage points in improving cash flow. If you don’t know those amounts, you’ve lost a vital tool.
- Cash-basis. For most small businesses, you need cash basis statements in order to prepare your tax return. That’s because the IRS lets small businesses decide what basis of taxation they want, and in most cases, cash-basis is the most tax advantageous.
These two financial statements are not the same! But if you properly enter data into a program like Quick Books, you can get both types of financial statements from one account.