The importance of cash flow for a business’s sustained financial success cannot be overstated. Positive cash flow affects daily operations, proper cash flow management, payroll, and the overall financial health of your business. Without it, businesses that would otherwise be successful with high-quality products and services can quickly flounder.
In the rapidly changing tax environment, especially with the emerging laws surrounding e-commerce, businesses should be aware of the potential impacts taxes can have on their cash flow. Tax credits can play a significant role in reducing tax liabilities and improving cash flow through taxes. Since tax laws can change throughout the year, it’s important to enlist the help of professionals whose sole responsibility revolves around staying up to date with compliance issues. Additionally, these professionals issue expert insight into how small businesses can anticipate changes in the tax code to ensure they stay ahead of the curve and use their tax obligations as an advantage instead of a hindrance.
At Fully Accountable, we believe businesses of all sizes and industries shouldn’t have to live in fear of whether tax season will hurt their financial status and opportunities. That’s why our full-service team of fractional tax professionals offers tax planning guidance so you can retain your positive cash flow. Continue reading to learn about some of the measures businesses can implement to ensure their tax strategy aligns with their cash flow goals for the year ahead.
Understand the Difference Between Book and Tax Planning
Companies use different tax reporting methods depending on their size and the products and services they offer. For example, tax planning for an e-commerce business will require strategies different from those utilized in a traditional brick-and-mortar business. To effectively manage taxes, it is crucial to calculate operating cash flow, focusing on the impact of taxes and understanding local tax regulations. Whether you use an accrual or cash method depends on several factors that your CPA or accounting firm should clearly relate to you.
Your financial team should be able to explain your reporting strategy in terms that make sense. You shouldn’t blindly accept what your accountant suggests. While they are financial professionals, the best-outsourced accounting firms include clearly defined financial strategies regarding your tax plan, including how revenue and expenses impact taxable income.
Clearly Understand Your Tax Obligations
It’s easy for business owners (especially e-commerce businesses) to overlook their tax obligations. Sales and use taxes are among the most commonly overlooked tax obligations. Proper tax planning, which involves understanding the role of income tax in assessing overall tax situations, is crucial for maintaining healthy cash flow. If you commit sales where your company doesn’t have a physical presence, you might be responsible for collecting and remitting taxes from out-of-state providers that don’t collect sales tax. This can cause complications as every state has a particular set of regulations.
Some municipalities even have location-specific tax nexuses. New York City’s commercial rent tax is an example of such a tax, which stipulates that tenants in certain regions of Manhattan have to pay an annual threshold.
Owners of sole proprietorships and partnerships might also neglect to add the self-employment tax on top of their income taxes. Whereas employers typically pay the Social Security and Medicare tax for W-2 employees, sole proprietors or partnerships have to shoulder this tax burden, and many are unaware of their responsibility to do so. Minimizing tax liability through comprehensive tax services and expert strategies can help manage these tax obligations efficiently.
Set Aside Tax Money Each Month
You might subscribe to the notion that you need to pump all of your available funds back into your business. A cash flow budget is essential for tracking and managing your cash inflows and outflows. While this strategy has merit, it can have damaging effects when it comes to balancing your tax plan with positive cash flow. Yes, you need to invest in your business to achieve growth, but you shouldn’t do so at the expense of your tax obligations. Set aside a percentage of your revenue and dedicate funds specifically to your tax obligations.
If you have an “S” corporation and you’re earning a salary, you can set aside tax funds each month. Doing so prevents you from having to dedicate a lump sum at the end of the year that can hinder the health of your cash flow.
If you own an LLC or sole proprietorship, you should allocate some of each draw to a tax saving account. When it comes time to pay your estimated taxes, you can pay them out of the savings account.
You can think of withholding your taxes as a trust fund situation. In this model, you are the trustee holding the funds on behalf of others. Because they will eventually be paid as taxes, you shouldn’t treat these funds as yours; they belong to the government.
Regularly Check Your Projections
Setting aside funds to pay the IRS doesn’t protect you from owing more to the IRS than anticipated. If you enjoy a better-than-anticipated year, you will have to re-evaluate your cash flow analysis to enhance cash flow. Tax forecasting can help you keep pace with your projections as they change, but it’s best to re-evaluate these projections as the year progresses.
Most small business owners have a general idea of their projected revenue and tax obligations. However, things change, and the last thing you need when it comes to cash flow is to be blindsided at the end of the year. Understanding cash flows from various activities, including operations and financing, is crucial for sustainable business growth. Your accounting team should prepare multiple forecasts annually to ensure you stay on top of your cash flow opportunities. A common strategy is to evaluate your taxes after filing them in April. The team should also issue a second report around November to prepare for the end of the year’s projected income.
Utilized Outsourced Help
The US tax code is thousands of pages long and changes regularly. At the state and municipal levels, there are also ever-changing tax statutes. The complications can be nearly impossible to track for a small business owner. Outsourcing can help businesses generate cash from their core activities by allowing them to focus on what they do best.
Keeping up with the nuances of tax codes is challenging enough for professionals, let alone for a small business owner trying to stay on top of growing their business, generating revenue, building brand reputation and awareness, and the complexities of employee and customer management. Outsourcing your tax planning for your cash flow affords you essential bandwidth so you can focus on running your business operations and improving your bottom line.
Understanding your tax obligations and planning ahead for tax season helps you save money and reduces stress when it comes time to pay the IRS. Having a proactive approach to taxes is one of the most important aspects of ensuring the health of your burgeoning business’s cash flow.
Combine Tax Planning and Financial Planning
Financial strategy and tax planning operate in tandem. They are not separate entities, and having an accounting team on your side helps merge these essential business components to increase cash flow. Merging these areas keeps your cash flow positive and improves your bottom line while scaling sustainably.
Companies that neglect to merge these two areas will likely find themselves in hot water when tax season rolls around. Businesses don’t fail by trying too hard. They fail when they ignore the writing on the wall. Tax planning makes up a substantial portion of that writing and has a profound impact on companies’ cash flow. Additionally, understanding and managing operating cash flow is crucial for maintaining financial stability and ensuring the company can cover operating expenses and pay dividends.
The pragmatic business owner understands how to plan around the tax season and use it to their advantage. They also understand that doing so requires the input of tax professionals. When coordinated correctly, tax planning brings about peace of mind that every business owner should strive for.
What Are the Differences Between Tax Planning and Tax Services?
At first glance, tax planning and tax services might seem like the same thing. However, there are differences between these concepts. Tax planning is a strategic approach to your taxes that anticipates and responds to changing tax codes and regulations. This plan not only ensures compliance; it also positions you in an advantageous position to retain a positive cash flow in the coming years.
Using tax planning resources typically utilizes financial professionals such as fractional CFOs who can offer financial guidance on a large scale rather than simply remaining compliant. They will be able to devise a tax strategy that meshes with your business’s overall financial objectives.
On the other hand, tax services refer specifically to determining your tax obligations and ensuring you remain compliant. Tax services typically don’t offer tax plan consulting services that integrate with your overall financial strategy.
Improve Your Cash Flow Through Tax Planning With Fully Accountable
Retaining positive cash flow is one of the most critical aspects of small business financial planning. As a small business owner, cash flow influences everything: your daily operations, inventory, and payroll. You name it, and cash flow will most likely affect it. It is the lifeblood of your business, and you can’t afford to ignore the potential obstacles that planning for taxes presents to its health.
At Fully Accountable, our team of fractional financial professionals has a wealth of experience managing companies in many different industries. We issue comprehensive tax planning to ensure you stay on top of your finances and enjoy a positive cash flow. We issue real-time reports and feature up-to-date accounting software that ensures you always stay on top of your cash flow and tax obligations.
Contact us today to start implementing a proven tax planning system with Fully Accountable.
