The Yin and Yang of Small Business Taxes and Cash Flow

Author: Irene Malatesta | March 29, 2018

Part 2: A look at common tax considerations for small business owners, with small business expert financial consultants Geni Whitehouse and Jan Haugo

Few business requirements elicit confusion and anxiety quite like taxes. In our ongoing effort to provide insight and advice for small business owners, we sat down with distinguished financial consultants Jan Haugo and Geni Whitehouse to discuss the latest tax considerations and strategies. In this installment, part 2 of our tax expert interview series, Haugo and Whitehouse discuss the thorny relationship between the tax liability of a small business and its cash reserves.

Jan Haugo
Jan Haugo, President, JH & Associates

Geni Whitehouse, CPA, Speaker & Instructor

They come out of the woodwork in late December. Last-minute shoppers, ill-prepared for the holidays, blitz malls and grocery stores in a frantic pursuit of presents and supplies. Finding the perfect gift, making the most exquisite meal, and exploiting the biggest sale often give way to a singular focus: The looming deadline.

In many ways, tax season is the same, says Jan Haugo, accountant, small business owner, and former CEO of the Institute of Certified Bookkeepers in the United States.

“Just like the holidays, everyone knows tax season is coming,” she explains, “but many still procrastinate, and they overspend or make unnecessary concessions as a result.”

For small businesses, effective tax preparation involves more than annual returns. It also demands a continuous and correlated focus on cash flow. Because business success can result in higher taxes and vice versa, the two share an indelible yin and yang relationship.

If you have a good Q4, you have to consider the tax implications for Q1, says Jan Haugo

“If you have a good Q4, you have to consider the tax implications for Q1,” Haugo insists. “But that’s not always instinctive. Many will feel flush and overspend at the end of the year, not anticipating a possible increase in both annual and quarterly taxes, which are right around the corner. You don’t want to face a decision in Q1 of whether to pay the IRS or pay your employees.”

Ebbs and Flows

“Small business owners sometimes spend what they make too freely and don’t maintain cash reserves,” says Geni Whitehouse, accountant, author, and 2017 CPA Practice Advisor Thought Leader. “Without cash reserves, it can be difficult to handle the loss of a big customer, shifts in the market, large invoices, and payroll.”

It’s important to have a financial safety net, she says. But small business owners must first understand the ups and downs of their company, and the ebbs and flows of their cash.

“You need to have all of your financials in one place,” says Haugo. “And you need to know how much money you have, how much is coming in, and how much is going out at all times.”

Without this visibility, the reasons behind a cash shortage aren’t always obvious. Is it because of overspending? Delayed invoicing? Delinquent payments? Seasonal slowdown? Something else?

“With 60- and 90-day payment terms becoming more common, small businesses can’t afford to be slow with their invoicing,” Haugo says. “And they need to have a clear understanding of their accounts receivable, knowing exactly how much is coming in and when. If there are gaps between payments and payroll—even if it’s only a handful of days—they need to be prepared.”

Cash vs. Accrual Accounting

Unfortunately, the money in the bank is only part of the tax equation. And that can lead to confusion and missteps.

“It’s easy to look at an empty bank account and make the assumption that you don’t have any tax liability,” says Whitehouse. “But that’s not always the case. You can be taxed on cash that has been spent on inventory, for example.”

How a small business tracks its financials will depend on the method of accounting applied: cash or accrual. The differences between the two—and which one to utilize—are often vexing for the most tax savvy of business owners, Whitehouse says.

“A lot of small businesses see the cash coming in, but not the cash that will be due,” she explains. “They don’t put bills into their system until they are ready to pay them, but they should be anticipating and tracking those costs in advance. There’s a difference between when a cost is incurred and when the bill is paid.”

Purely monitoring the inflow and outflow of cash doesn’t always reveal the true financial health of a business, Whitehouse adds. Looking beyond bank statements and gaining full visibility of the financials—including incurred and impending costs—will help with cash management.

“It’s easy to look at an empty bank account and make the assumption that you don’t have any tax liability,” says Whitehouse. “But that’s not always the case.”

Getting Help and Being Prepared

Both Haugo and Whitehouse suggest getting professional assistance, not only for the yin of tax planning but also for the yang of cash management.

“Don’t be embarrassed or afraid to ask for help,” Haugo recommends. “It’s hard to discuss money or ask for money when times are tough, but we’ve all been there.”

When cash flow wanes, however, it can be difficult to find short-term relief.

“Small businesses gear their books to show the least amount of income and revenue, hoping to minimize their tax liability,” says Whitehouse. “But then they go to the bank for a loan and are denied because the business doesn’t look healthy.”

Fortunately, alternate sources of credit are available, helping small businesses prepare for the inevitable dips in their cash reserves. At Fundbox, helping small business owners survive and thrive is priority number one.

“Fundbox can help,” Whitehouse says. “It’s a very cool company, and I’m a big fan. There’s no paperwork, which is a huge change from traditional banks.”

“Fundbox is awesome,” Haugo concurs. “They’re supportive, available, and transparent, with excellent customer service. They really are an advocate for small businesses. But just like I tell my clients, your financials need to be accurate and up to date.”

In other words, don’t wait until late December to start preparing for the holidays.

Catch up on Part 1 of our tax expert series: 5 common tax mistakes small business owners make

 

About Geni Whitehouse

Geni Whitehouse, CPA, divides her time between working as a winery consultant at Brotemarkle, Davis & Co in the Napa Valley and writing, speaking, tweeting, and posting at EvenANerd.com. She is a co-founder of Solve Services, a remote bookkeeping business for the wine industry, and the author of “How to Make a Boring Subject Interesting: 52 ways even a nerd can be heard,” which is available on Amazon.com. Geni is a regular keynote presenter at CPA and technology conferences around the country, and was curator and inaugural speaker at the TEDxNapaValley event series. She has been named one of the 100 Most Influential People (Accounting Today), a Thought Leader in Accounting (CPA Practice Advisor), and one of the Most Powerful Women in Accounting (CPA Practice Advisor).

About Jan Haugo

Jan Haugo is an accountant, small business owner, and former CEO of the Institute of Certified Bookkeepers in the United States. She founded Jan Haugo & Associates in 2000, which offers bookkeeping and accounting services to small businesses in the Phoenix area. Jan utilizes cloud-based accounting products and technology applications to support her clients and enhance their collaborative workflow environments. Her unique, integrated approach of working with business, banking, and investment specialists helps align the efforts and outcomes of each client’s extended support team. In addition to leading her own firm, she also works with Kansas, MO, firm MarksNelson CPA, where she serves as a supervisor, implementing cloud solutions with their entrepreneurial services division. According to CPA Practice Advisor, Jan is one of the Most Powerful Women in Accounting.

 

Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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