The Massive Tax Mistake that Many Small Businesses Make

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Business taxes During this past month the topic was always on money: how to get it, how to save it, and, an increasingly pertinent topic, how not to pay taxes on it.

Well, it is that time of year. We are gathering all our financial data for the past year and planning meetings with our CPAs and financial advisors.

Almost every business owner I have been meeting with over the last few weeks have all been complaining about paying taxes and looking for strategies that will reduce it to the lowest possible level.

During tax time, most small businesses focus on NOT paying taxes. And when sitting down with their CPAs, paying no or as little taxes as they can is their only focus. That usually means that they do not want to show any profit from their business operations.

Bad Ramifications for Your Business

If you don’t have a profitability strategy in place and shared that strategy with your tax accountant, you just might be in dire straits. What could those consequences be? They could include:

  • Decline in an increase in your credit line
  • Cancellation of your credit line
  • Denial of a loan application
  • Loss of investors

Most CPAs will do what you ask them to do, especially if you do not have an ongoing financial consulting relationship with them throughout the year. If your CPA does not understand what your growth plans are, they cannot effectively help you with the best way to deal with tax issues—among the other matters which are integral to your business.

Why This is Important

If you are in the market for financing—whether it is now or in the future—you need to start now in developing an effective profitability strategy to ensure that you are the right candidate for a financing source.

This means you need to have (or develop) an ongoing relationship with a financial professional that can help you to truly understand your financials and what is required to get financing in today’s economic environment.

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Most lenders expect you to provide updated financial statements and will be looking to see if your business has the capacity to service debt. That means they will be looking to see whether your profitability and cash flow can service the debt without straining the company.

In most cases, financing sources are looking to see if your company has been profitable for the last 2 to 3 years. That is to ensure that you have the capacity to repay the debt that new financing will require.

At a minimum, lenders require that for every $1.00 of debt you have $1.25 in assets to repay that debt. Some lenders may have higher requirements—make sure you understand what the requirements are for your specific lender.

It is important to note, that in order to get the money you need to grow your business, the main issue is not the amount of taxes you pay. It is the level of profitability you need to show.

DianeWekler-sml-for-postsDiane Weklar, the Authority on Accelerating Business Growth, is the CEO of the Weklar Business Institute. She is the author of the award winning book, Mastering the Money Maze: 10 Secrets to Winning Business Financing,which is also an Amazon #1 Best Seller. This book provides practical insight to build a successful business and the practical steps to raise capital to help your firm grow. She can be reached at Diane@Weklar.com.

 

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