Weekly Tip

By Leslie Shiner, The Shiner Group- CEDIA Professional Service Member

Own Your Numbers

For many of you, your financials are owned by your CPA or Tax Preparer. You set up your books the way he or she tells you to. Then, once a year, you print out the requested reports and send them to him. That certainly makes his job easier when it comes to tax time. But does it really help you?

Who needs to see what when? Your tax preparer needs to work with your numbers one day a year. You need to work with your number 365 days a year. So why not set them up to meet your needs, and let the tax preparer make changes once per year?

What does this mean for you? First, you might have a car loan. By accounting rules, that means you can only deduct the interest portion of the payments. But your business needs to generate enough cash each month to pay both the interest and principal. Why not deduct the full amount of the payments, and then, at the end of the year, let your accountant make the adjustment to correct the books? It certainly will help you see if your gross profit is covering your total overhead, include all the loan payments.

If your company is a sole proprietorship or subchapter S corporation, the owner can pull out money as a draw or distribution. The problem with these types of transactions is that they appear on the Balance Sheet, and not as a deduction against the net profit on the Profit and Loss (P&L) Statement. For example, I saw a company that recorded a net profit of $50,000, but the owner pulled out $70,000. And then the owner wondered why there was no money left in the bank account.

Modify your P&L. Instead, create an ‘other expense’ account for money that, when pulled out of the company, typically ends up on the Balance Sheet. This includes draws/distributions, loan principal payments, income tax payments, etc. As long as it is in a section called ‘other expenses,’ your P&L will show two different net income numbers. First, there is ‘net ordinary income,’ which represents the amount that will be similar to your taxable income. Then the other expenses are deducted with a resulting net income. If your net ordinary income is positive, and your net income is negative, you may be pulling too much cash out of the business to pay down loans or for personal withdrawals.

Another example of making the numbers work for you is the issue of when to recognize equipment purchased for jobs, but not yet installed. I say you should expense it to the jobs immediately; it’s better to see the costs in the job as soon as possible than to wait until the end of the job to discover you’ve spent more than the budget. Your accountant may disagree, and may be correct from a tax perspective. My solution is that you run the numbers the way that provides you the most information for you. At the end of the year, the accountant can put those dollars back into inventory for your tax return.

The question is: who needs to see the numbers and how can you use them to better manage your company? Find a way to create a P&L and job cost reports that are meaningful to you. Use those numbers to manage your business and make sound financial decisions. Then, once a year, let your accounting convert them to the ‘right’ numbers for the tax return.

Leslie Shiner—author, speaker, and trainer—has more than twenty years experience as a financial and management consultant. She is the owner and principal of The ShinerGroup, a consulting firm helping businesses gain financial control. As a business coach, she has worked with both small and large businesses to help them better understand their business practices and maximize their profits. She is the author of “A Simple Guide to Turning a Profit as a Contractor.” Ms Shiner is an engaging speaker with a long history of rave reviews. She continues to receive high praise for her ability to make financial management interesting, understandable, and even entertaining.