| It is that time of the year - getting the tax returns done | | | | your true monthly profit |
| for your small business. For some, it's also time to | | | | - Your comparisons with prior periods will be useless |
| ponder the difference between cash and accrual. Let | | | | - Your material costs will not correspond to your |
| me throw some variables into the mix to help you with | | | | revenues and therefore |
| your decision. | | | | - You will not have any reliable margin information |
| Many (too many) small business owners see the Profit | | | | All this means that you will be in no position to manage |
| and Loss statement for their business as the means | | | | any aspects of your business and monitor your results |
| to get their taxes done. They feel as if it were its only | | | | against any financial targets. |
| purpose and reason for being. Perhaps we should | | | | For some small business owners that's not really a |
| even call the Profit and Loss statement the "Small | | | | problem. They generate a certain amount of cash |
| Business Tax Profit Statement"? | | | | which makes them happy and that's it. Their operation |
| And many also believe that every decision made for | | | | is still small enough to be very transparent to them |
| tax purposes will automatically affect the way books | | | | without any monthly financials. |
| are kept as well, because, after all, the only reason to | | | | But if you have grown beyond that point, or if you |
| even keep books is so you know how much taxes | | | | want more, if you are interested in finding out why you |
| you need to pay, right? | | | | have generated this amount of cash and not more, or |
| Not quite... Not if you want to really maximize your | | | | why all of a sudden the amount of cash your business |
| potential in business. | | | | brings is shrinking, you will need to turn to your financial |
| Many small businesses are better off using cash basis | | | | information and the small business tax profit will be of |
| accounting for tax purposes. That doesn't mean, | | | | little help. |
| however that they have to use the same basis for | | | | Small Business Tax Profit and Small Business Book |
| their book purposes. You see, your own, internal | | | | Profit need not be the same and probably should not |
| accounting does not have to follow what you do for | | | | be the same. Remember, internal financial reporting |
| tax purposes. In fact, in most cases small business tax | | | | and managing your business is the first and most |
| profit is not what you want to look at when making | | | | important purpose you even gather any financial |
| your business decisions. | | | | information at all. The rules that govern financial |
| Actually, when all you know is your small business tax | | | | accounting may not be perfect, but they are aimed at |
| profit at the end of the year, you are not using your | | | | giving you the most reliable financial picture of your |
| financial information at all to help you make your | | | | business activities. |
| business more successful and profitable. | | | | Tax returns are governed by the tax law. Also, the |
| Your Monthly Profit and Loss Statements are a | | | | taxes you pay is just one of your business expenses, |
| Goldmine of Information | | | | but often not the largest one. It's just that they are paid |
| This is true, but only if your Profit and Loss statement | | | | only once a year. Imagine if you had to pay all your |
| is prepared correctly and then used as it is meant to | | | | material costs or all your rent only once per year... |
| be used. | | | | Your cost of sales and your payroll are often the |
| When you follow cash accounting method for internal | | | | largest expense items on your Profit and Loss |
| reporting purposes, most of your financial ratios will be | | | | statement. Without proper financial analysis you will not |
| distorted. For example: | | | | have the means to control and manage them as well |
| - If you have prepaid your rent in January for the next | | | | as you could. |
| 16 months, that entire cost will appear only in that | | | | Getting your tax return done is certainly one of the |
| month and not show up at all in any other month this | | | | purposes for your financial statements, but not The |
| or next year | | | | Only One. |
| - You will not know your monthly overhead costs or | | | | |