Rather than theory, here is a synopsis of a recent conversation -
A. An insurance agent who, like the majority of insurance agents, is non-captive and running her own book of business. Every year, she files and pays her taxes as a sole proprietor on her Sch C of her Form 1040. And, again, like many in her business, she does not use any accounting software, but instead uses excel at the end of the year and adds up everything from her bank and credit card statements using excel. She then proceeds to prepare her taxes on one of the many self-prep software available.
Some other things about our insurance agent; she does not have employees, but recently opened up a physical office to meet with clients; she gets paid commissions by the insurance companies but does not invoice them directly. Because she is small, she can get away with this, because she knows her clients and looks at the reports from the insurance companies.
So, many people may think, what is wrong with that? She is actually filing and paying her taxes, Great!
But, from the perspective of general business requirements and from tax perspective, she is probably leaving a lot on the table, and not keeping adequate records for any business purpose. There are really so many things that come to mind, what and why to change causes your eyes start to roll back in your head.
To start with the obvious, which has been the topic of other blogs, someone who is self employed really needs to have a solid tax preparer who can help them with the many ins and outs of correctly and accurately reporting for tax purposes. Other reasons are tax planning and projection (know your quarterly estimates ahead of time instead of penalties for no estimates and a big surprise, usually not so nice, all at the same time). Also, because retirement saving via things like SEP IRAs and Simple IRAS, etc can be dependent upon your taxable income, you really want to maximize your retirement funding while helping to reduce your tax bill.
From the business perspective, things that are getting missed are basic information and record-keeping requirements. Bank and credit card statements are not enough to support expenses and you also need to be reviewing your receivables against what was received.
The old adage, What you measure you can manage is true. How do you know, quickly and easily how your business is doing financially? When you need to ask for a line of credit and your bank requires financials, you could miss the timing because you are not up to date. How to track debts owed to the company, or by your company?So many things come to mind.
In this scenario, what would be our starting suggestions, assuming price-sensitivity (aren't we all).
- First, and very importantly - get onto some form of standardized, computerized accounting and learn how to use it. (Xero, QuickBooks, etc)
- Second and better together with the first - get help from a professional. Often you can save some money by having a bookkeeper help with setup and support, and then work with the tax preparer for planning, projection and preparation. (Shameless Plug - Rincon Controller and Tax Services does all of this as part of their monthly fixed price agreements).
- Third-and important - at minimum, review bank feeds into the software weekly, but it is much easier and faster to do daily.
- Fourth - review financials quarterly or mid-year with a professional to go over corrections and adjustments, questions and planning
- Last - at the end of the year, after everything has been entered and corrected, print the financials and keep it with your tax return. That way, when you go for whatever lending that may be needed, you have it all in one place.