CPA Tae Macias of Eagle Rock-based Padgett Business Services prepares small business owners for 2011 success.
Organization is so important for small businesses, especially in this economic climate. Governments at all levels are running deficits and looking for easy ways to close the gaping holes in their budgets. We’ve seen that the IRS is increasingly focused on audits of small businesses, who are apparently an easy target for them. This may be because small businesses are often less organized, and sometimes unable to substantiate the expenses they claim on their returns. It may also be that some small businesses are underpaying taxes, either intentionally or inadvertently.
One of the things I recommend to my business clients is to go as paperless as they can possibly go, as early as possible. It saves so much time and effort looking for lost documents at tax time, or heaven forbid, in the case of an audit a few years down the line. A scanner capable of duplex, multi-sheet scanning is an investment every business owner should make, and they should get into the habit of scanning all bills, statements, checks, contracts, and other financial documents. Even if you’re organized, paper files can get pulled and put out of place. I’ve heard many well-organized clients tell me, “I think I gave that document to my old accountant/lawyer/insurance agent/auditor, and I don’t think I ever got it back”. Electronic copies are such an easy way to avoid that scenario. The same principle applies to individuals. If your tax situation is complex, you can probably afford the cost of a decent scanner and a few back-up USB hard drives. The savings in time and the savings in physical storage space for your records usually makes it worthwhile.
Update the plan
Many new business owners begin their businesses in excellent financial health, but find themselves struggling with cash flow a year or two down the line. The problem, especially in this economy, is that they haven’t set realistic expectations for the upfront cash investment required, haven’t accounted for certain expenses, and probably set their sales projections a little too high. Entrepreneurs are some of the most optimistic people you’ll find; it’s their nature. They have to be optimistic, otherwise they’d still be sitting at a desk somewhere working for someone else.
So some entrepreneurs jump into a new business without a well thought out financial plan, anticipating that they’ll just make it work. Others have a plan, but their projections are overly optimistic. It can be worthwhile to sit down early in the process just to talk through the plan, get a reality check on the assumptions they’re making, find out what margins and expenses are common for other businesses in the same industry and run the numbers on how much cash it will really take to make the business work.
Finally, follow-up on that plan is just as important, and this is the part most business owners don’t do. Once the business is running, that plan needs to be updated periodically so that the cash flow projections can be corrected, and business decisions can be made accordingly.