- A discussion, from a tax perspective, whether it is better to file your taxes on a cash basis or an accrual basis. (Cash basis is when you record a sale when you receive payment and record an expense when you pay the expense. There are no accounts receivable, accounts payable, or inventory. Accrual basis means you record a sale when you send the bill and record an expense when you get the invoice. There are accounts receivable, accounts payable, and inventory).
For business operations, you should operate your business on an accrual basis. This is the only way that you will have consistent gross margins and be able to make good business decisions based on what your financial statements are telling you. With accrual accounting, you can also track accounts receivable, accounts payable, and inventory properly.
If your CPA tells you that you should operate your business on a cash basis, and absolutely insists that you do, find another CPA. It is fairly easy to make the journal entries at the end of the year to change an accrual based accounting system into a cash based accounting for tax purposes.
- Tax planning. In September or October of each year, you should meet with your CPA to do tax planning for the year. Some companies meet twice per year. Tax planning is important and prevents the “surprise” tax bill at the end of the year. If you meet in December, it is too late to do much tax planning.
Give your CPA accurate information so that he can actually help you with tax planning. If you don’t have accurate revenue or expenses, then he can’t give you good advice. This means producing accurate financial statements each month so that the year’s tax statement is also accurate.
Some CPA’s provide bookkeeping services as well as tax services. Even if you use your CPA to produce your monthly financial statements, you cannot abdicate the responsibility for understanding what those statements mean. You can delegate the monthly creation of those statements. You must review them and take action based on what they are saying. It’s your business—not your CPA’s business.
- For those of you who have inventory, an inventory discussion. First, inventory must be accurate to get accurate financial statements and make good business decisions. Your CPA can tell you when to write off obsolete inventory. Remember that writing off inventory means a smaller profit.
I recently had breakfast with a colleague. We had a conversation about her accounting software and some of the problems she was having with it. I asked her a few questions and she didn’t know the answers. Her feelings were that her CPA should have explained these issues to her. She was particularly upset about a surprise IRS tax bill in January.
CPA’s provide a valuable service. However, you can’t expect them to read your mind, tell you what is wrong with your business, or give you opinions about your business. Some are great business consultants along with their tax knowledge. Others prefer to simply prepare your financial statements and tax returns. You need to determine which type of CPA you are using for your business.
CPA’s prepare compiled statements for most businesses. These are financial statements based totally on the information you provide them. The phrase “garbage in equals garbage out” is very critical here. If you don’t give them good information, they can’t give you accurate financial statements and accurate taxes.
CPA’s can also prepare reviewed and audited statements, which are more complicated, more accurate, and more costly. Your CPA reviews or audits the dollar values stated for revenues and expenses as well as balance sheet amounts. These are generally prepared because of bank or other lender requirements.
As a small business owner, here’s what you can and should expect from your CPA:
Many small business owners have a misconception that they can rely on, or expect their CPA to tell them what is going wrong with their business. It is not a CPA’s job to teach you how to read financial statements and understand financial ratios—unless you want to pay them a lot of money!
Many times CPA’s will say “raise prices” when they see negative bottom lines. However, raising prices may not be the only answer. You could have productivity issues, personnel issues, or other areas that need improvement. It’s best to learn what a balance sheet and profit and loss statement mean. It takes less than 30 minutes each month to review your financial statements, plot the trends, and take action based on what they are saying.
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