It is that time of year when the air turns brisk, the holidays are upon us and we see the end of the year staring us straight in our faces.
I am gathering my financial data for the past year and planning meetings with my CPA. We will discuss what happened this past year, my goals for the future and the steps I need to take to reach them.
Unfortunately, many businesses don’t do this—and they suffer badly in the long run.
The Big Mistake that Most Businesses are Making
During this past month every meeting I had 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.
Almost every business owner has been complaining about paying taxes and looking for strategies that will reduce it to the lowest possible level.
In fact, most small businesses focus on NOT paying taxes.
And when sitting down with their CPAs, business owners tend to instruct them that their only goal is paying no, or as little taxes as they can.
That usually means that they do not want to show any profit from their business operations. And that may be the biggest mistake they are making which has long term repercussions.
Bad Ramifications for Your Business
If you don’t have a profitability strategy in place and shared that strategy with your CPA or 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.
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.
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.
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.
This means you need to have (or develop) an ongoing relationship with a financial professional that can help you to truly understand your financial statements and what is required to get financing in today’s economic environment.
Using Financial Statements Effectively
Today, your business needs to be looking at taxes as the cost of doing business—no different than paying for insurance or other resources your business needs.
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.
But keep in mind that your financial statements are an important tool to help your firm grow.
By understanding the numbers in your financial statement you can recognize your breakeven points, figure out your “sweet spots” and keep your business on track to reach its goals.
Financial statements can help you understand the difficulties you are having in your business and the effects of various strategies on growth and productivity.
Don’t think of financial statements as something you need to do for your banker. It is an essential tool in running an effective business.
Talk with your financial advisor today and spend the time to understand this most important key in growing your business.
Join us next week to get a true understanding of the value of financial statements. We will show you how to find your operational sweet spots to meet productivity goals by understanding the numbers in your financial statements.
Diane 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.