Everybody knows that you should do tax planning, but there is more to a tax planning strategy than saving receipts, estimating payments and updating your financial statements. While filing last year’s returns, there are additional steps to take now that will improve your future tax situation and optimize tax results.
The following five areas address business operations, customer relationships and the tax implications of business and life transition planning. There may also be more money available from your previous tax returns that could improve cash flow.
#1 Improve your margins.
Business growth depends on increasing income and
reducing expenses, but at tax time it seems like expenses are a good thing because they reduce
your taxable income.
We assume, however, that you aren’t in business just to work and avoid taxes. Instead, look at your business as an economic engine that exists to power your future. You need it to be profitable and lasting. Among the most important key performance indicators are your margins. Are they increasing or not? Your CPA can work with you to identify two important ones — operating profit margin and gross profit margin. These numbers can tell you whether you are charging the right amount for products and services and even where you can cut expenses and waste.
Your operating profit margin is found by dividing operating income by net sales…numbers that can be found on your financial statements. This figure shows how much of every dollar in sales ends up as pre-tax operating profit — your overall profitability. The more you can boost your operating profit margin, the more money you are making from your hard work at sales.
The other very important margin, your gross profit margin, gets into the details of your expenses to produce goods or services. It tells you exactly how much money you have left after you pay all the costs of production: marketing, sales, payroll, overhead etc. This number tells you exactly how efficient the business operates. After determining your margins, you can work with your CPA to address which products or services produce the best margins and which are costing you money. You can also address inefficiencies in sourcing or production that could be handled in more cost-effective ways.
#2 Review the quality of your customers.
Who are your best customers? They are certainly the ones you enjoy, but they should also be the ones who stick with you and use more than one product or service.
Customers who consistently cost you money aren’t real customers. An analysis of customer relationships can narrow the customer base that actually produces profits. This customer base may also support new opportunities for research and development and referrals.
Once you have them as customers, study their purchase history. Has their purchasing remained steady or dropped off? It is financially more expensive to acquire new customers than to retain existing ones, which is why your sales pipeline needs to address “sales” to your best clients. Investment in this area may include an automated customer relationship management or marketing system or a simple line item for customer gifts — both of which may be deductible!
Maintaining good customer relationships also ties to a transparent accounting and billing system. Accurate billing, timely invoicing and collections are opportunities for communication with your customers that go beyond the numbers. Your CPA can identify areas of inefficiency in your bookkeeping and accounting processes and procedures. One recommendation may be a change in staffing or even outsourcing those functions for greater efficiency and less cost.
#3 Take a closer look at staffing.
As a company grows, business owners need to adjust the organizational chart. The decision to use contractors versus employees to handle more work has tax implications with regard to paying overtime and benefits. While it seems easiest to keep hiring as you need capacity or reduce hours as business slows, there may be deeper business issues at play that your CPA can support.
The talent you have now may not match the direction you want to take the company. Perhaps training is needed. Maybe a staffing agency can provide interim talent. There are also outsource options such as controller or CFO services through your CPA. It is important, of course, to choose an agency or CPA firm that actually has experience providing specialists and services of this nature to your business.
#4 Plan your business transition.
The common assumption in business circles right now is that half of all business sales fail during the due diligence process. It’s usually because the seller has failed to adequately consider the buyer’s risks. When planning your exit or the transition of your business, you need more than a potential buyer. The timing of your exit and the overall health of your business also have tax consequences.
Although it’s not easy, have a discussion with your CPA about your future goals beyond the business. It can help you structure the business properly. You can fix trouble spots, add efficiencies and improve cash flow to make the business attractive to a buyer. An exit or transition plan can even retain top talent. Your best people want to know that a plan is in place for their future security at your company.
The question of when to exit a business triggers other questions about retirement, estate planning and wealth management. How will the sale impact your personal tax situation? What will you do with the proceeds? What’s next? Do you want to start another business or explore a new career? Having answers to these questions years before you need them will better help you adjust them and personally prepare for change.
#5 Don’t miss additional tax opportunities.
If your business has struggled with recent losses, one way to provide cash infusion is to see whether you might be eligible for a carryback of net operating losses (NOLs). Effective for tax years beginning on or after January 1, 2013, California allows taxpayers to carry current year NOLs back to the two immediately preceding tax years (subject to certain limitations). Alternatively, taxpayers can elect to carry such losses forward as far as 20 years to manage increased profitability.
Of course, anticipating a loss or a gain should be discussed with your CPA prior to tax filing time. NOLs can be managed in various ways according to your unique tax situation. For example, you may apply them to refunds of estimated tax payments or apply the loss to a calculation of taxes owed. There are, of course, other tax opportunities that can be discovered when you get proactive advice through the year. Certain business activities, the timing of equipment purchases and other investments play a role in managing your tax position.
In any of these five areas, whether it’s a long-term decision about transition planning or a short-term decision on staffing or cash flow, an ongoing relationship with your CPA can really pay off. Throughout the year, continue the conversation on compliance, business strategies and personal finances.
Call the tax team at LSL CPAs to see how our professional insights can optimize your tax situation and business.
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