This week’s featured blogger is: Tina Ryan of Bookkeeping Girls
Every successful business has two elements: good accounting and good people.
Many businesses fall victim to the garbage in-garbage out principle of accounting, which means that messy, inaccurate bookkeeping leads to erroneous financial statements. Good accounting is creating accurate, timely financial statements that truly reflect where your business stands on a month-to-month basis. Without up-to-date accounting records, as a business owner you are unable to make educated business decisions on a timely basis.
Why is good accounting and record keeping so crucial to your businesss success?
Having accurate, timely monthly financial statements breeds many benefits. Here are a few:
You will be able to evaluate your businesss statistics to the industrys statistics.
You can compare your businesss profitability to the budget, the prior year or month, and the overall goals of the company.
Monthly financial statements remove the blindfold and show you whether your business is profitable. Too often owners and managers assume being busy equates to profitability.
With monthly financial statements you can be proactive. You will see downturns coming before they hit, and you can plan accordingly. Three month old financial statements are not much of a management tool when its too late to head off a disaster.
Financial statements allow you to monitor sales, costs and other trends in your business.
Lenders will request financial statements to purchase large equipment, expand businesses operation and purchase other related businesses.
How do you get good accounting?
Whether or not you are good with numbers, having monthly financial statements is possible for every business owner, manager, president, etc.
If you produce your statements in-house, make sure you have a software system in place that meets the demands of your business. It should be able to handle the size of your company, the industry you are in, and the specific information you need to make effective business decisions. In addition, be sure you have someone qualified doing your bookkeeping and accounting. A good bookkeeper who can help you keep accurate and up to date information and produce accurate and timely financial reports is essential to running a successful, profitable business. It is also important to have a trusted third party adviser involved with your internal accounting system. Third party advisers can look at the accounting system objectively. They can identify areas of improvement and suggest changes in the system to protect the owners from fraud or embezzlement. A good CPA with the knowledge of the financial and tax legalities is also a great asset to have on your team.
You also have the option of outsourcing your bookkeeping and accounting. There are many benefits to outsourcing. You work with experience that has depth of knowledge in bookkeeping and accounting. Outsources professionals will be able to provide you with the resources needed to handle your bookkeeping and financial needs. Your time as a business owner will be freed up to work on projects and important things related to your core business, rather than being bogged down with financials and daily record keeping. In almost every case, the benefits received from outsourcing far outweigh the fees.
When do you start?
Good accounting should be a top priority of every business that seeks success. So now is the best time to get back to the basics of good accounting. You will make more effective, relevant, and timely business decisions and have certainty at all times where your business stands.
By keeping accurate and honest financial records you will always be prepared. And you will know where that money that you work so hard for goes. You will also be prepared for any financial curve ball that may come your way. One such curve-ball is a business audit.
So you want to avoid a business audit who doesn’t? The IRS randomly audits businesses all over the country. If youd like to avoid being one of them, here are six scenarios you should stay away from; they all tend to trigger examinations.
- Travel and entertainment expenses
The good old days are gone. These days its best to keep rigorous account of your travel and entertainment (T&E) expenses. The good news is its easy enough. All you need is a spiral notepad and a bit of discipline enough to keep accurate records of the amount, time/place and business purpose of your expense. If youre entertaining clients you also need include in your notebook the person you entertained, your business relationship with him/her, and why the entertainment took place. (And of course the date.) Anything over $75 should also be documented with a receipt or credit card statement.
- Targeted industries
Ever heard of an IRS audit technique guide? If not read on. The IRS specifically targets certain industries and professions. Why? Because the IRS believes theyre the industries most likely to abuse federal and state tax laws. If youre in one of these industries, your chances for an audit are greater. The good news is you can read the audit technique guide and learn some of the violations the IRS expects to find.
- Employment taxes
This red flag has been around for years. It directly affects small business owners who hire independent contractors rather than hiring full and/or part-time employees. The catch is an independent contractor has to fully qualify as independent by working outside your business for specific hours, etc. The IRS will not consider someone who regularly works inside your office 40 hours a week a freelancer. Why? Because they will generally believe youre controlling his/her work and how its done rather than vice versa.
- Sole proprietors
For a long time, sole proprietors have been off the IRS audit radar. Times have changed. Ever since the IRS realized this group has over twice the total of unreported taxes as the countrys largest businesses, its been refocusing its efforts on the smallest of business owners. The bad news is this trend isn’t over yet.
- Fringe benefits
If you and your key employees already make a pretty decent salary, and you’ve been thinking of providing everyone with some pretty cushy non-cash benefits, think again. The IRS may be on to you real soon. If youre audited, be prepared to justify comp packages that include deferred compensation, employee stock options, and special insurance plans. They’ve even launched a new program dedicated to tracking down executive fringe benefits.
- Owner compensation
You own your own business so you can pretty much pay yourself whatever you like? Right? Wrong. You can as long as the IRS agrees with you. But if it considers your salary to be too high for your business and/or industry, it can trigger an audit. Some of these cases end up in court, especially when a C corporation owners compensation is too high or, on the other hand, the salary of an S corporation owner is too low.
The Government Squeeze
With the federal deficit topping a record $1 trillion and rapidly on its way to nearly doubling by this fall, the government desperately needs to squeeze out every tax dollar it can find. That could translate into more audits or at least a letter from the IRS politely asking you to re-figure your taxes.
“You’re not going to find a document that says this, but it’s very clear that in a budget deficit, increased tax collection is another source of revenue,” federal this a quote from a tax expert. “It’s revenue that should be there that doesn’t come in.”
The IRS estimates that it fails to collect about $345 billion in taxes each year. The largest chunk of the uncollected portion comes from individual income taxes, which accounts for nearly $200 billion. That explains why you now have a one in 99 chance of getting audited when just 10 years ago it was a one in 202.
Of the billions in individual under-reported tax revenue, just over half about $109 billion comes from uncollected business income. So if you’re a small business owner or you’re in a partnership you’re much more likely to be audited.
Going after these targeted groups where nonpayment is highest has paid off. Whether it’s tax cheats or simply innocent taxpayers who aren’t good at math, increased enforcement has netted Uncle Sam an additional $55 billion a year. He’s working on plans to capture much more.
The IRS says nearly 84 percent of taxpayers voluntarily pay their taxes on time and its goal is to increase that rate to 86 percent this year. Congressional leaders have asked the agency to reach 90 percent by 2017. That’s no simple task given that this number hasn’t changed more than a few percentage points in more than three decades.
You may not realize it, but IRS audits or letters can come at any time during the year. Even if you get your refund and it appears all is well, the IRS could flag a return or question the amount returned to you later in the year. That illustrates the need to keep receipts and documents in a file, just in case.
Will you be audited?
Although audits are increasing and certain taxpayers small business owners and those in higher income groups are more likely to be audited, your chance of being called for an audit is still quite low. If you’re an individual with income from an employer that files a W2, it’s likely you won’t be singled out unless you have extremely high deductions or something else that gets you pulled out of the millions of returns filed each year.
The bottom line is the bottom line. Theres no free lunch, but good record keeping and accurate financial via a good bookkeeper, a good CPA that knows the ins and out of todays tax laws and can file those timely tax returns and a strong business adviser can help ensure youre steering in the right direction.
As for the good part…