If you're thinking about, or in the middle of, tax preparation for your small business, consider using your time wisely to also get some information to help you plan for added profit and growth in the coming year.
Tax savings are great, but remember that they are only one element of your business’s overall profit and loss––one part of the full puzzle. And of course your ultimate goal is business growth, so you want to spend just as much time being strategic in other areas of your business as you are about taxes.
The good news is that the time you spend during tax season can also yield some smart analysis and building blocks for more comprehensive planning for the coming year.
Here are 3 things you can do to make the most out of tax preparation for your business.
1. Categorize your expenses
When you compile expenses for taxes you're likely thinking about sorting them by deduction type. There’s another way of looking at expenses that will help you get strategic about your profitability and growth, and that’s to categorize your expenses by operational type. You can use these categories to plan better for the next year. The common categories are:
cost of goods
sales and marketing
general and administrative
human resources and training
rent and utilities
insurance and legal
it also helps to categorize each as fixed or variable
Start by focusing on fixed expenses and bringing them down as much as possible. Can you make any cuts or renegotiate anything?
For variable expenses, try to set those as a percentage of your revenue. For instance, for most service based businesses the sum of general and administrative expenses should be somewhere between 8 - 10% of overall revenue, and sales and marketing usually falls somewhere around 15%. This will set some healthy limits and help you establish goals and associated drivers to affect your profits.
2. Identify your true cost of payroll
Employees are your biggest and most important resource, so you want to be sure you have a strong support system for them. You need to ensure you’re paying them fairly, you have a plan to increase pay over time, and that your business can afford it all. You also want to consider the benefits you offer - that they are competitive in your industry, affordable for your business, and include soft benefits like training and professional development.
As you compile your wage expenses for taxes, think about the employee related expenses mentioned above, and calculate the number for your business by adding up all your expenses in those categories, (don’t forget payroll taxes and if you pay a payroll service) and dividing by your total wages. That percentage is called your wage burden. You can use it to plan for your expenses and profit for the following year.
A healthy wage burden is somewhere between 20 - 24%. If yours is higher, determine if your added benefits are actually benefitting anyone. If not, consider replacing them with something else.
Use the total wage number to budget raises over time. Depending on the economic climate, most companies budget 3 - 5% annually for cost of living wage increases, and more for promotions or merit based increases.
3. Find trends in your sales
Look at your sales month-by-month over the year and see if you can spot any trends. Ask yourself these questions:
Do you see higher or lower sales by season, or month?
Do certain sales types do better than others?
Do you see certain averages by month?
Are sales increasing or decreasing in a certain pattern over time?
Note these trends and apply them to sales projections for the coming year. If you have a budgeting process you can do this step there, or even better, build a financial forecast to plan and predict your profit and cash.
A forecast will indeed predict your profit and cash over the next months and years, and it will also show what your business will need to budget for expenses, and how all of that will equate to cash.
Bring it all back to your taxes
But wait a minute, weren’t you trying to do some simple tax prep?! Yes. And you should definitely keep going. However, remember that taxes are simply one element of your profit and loss––an important one, with all kinds of rules, but still one among many others.
Planning for taxes is only one element of your planning, and if you have your entire profit and loss and cash flow in a budget and forecast, you will make smarter decisions about how to plan for taxes in advance, culminating in more tax savings and a healthier bottom line for your business.
If you’d like help with any of this type of planning, or financial forecasting and analysis, reach out to us! This is what we do. We love it, and we’re good at it!
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