Tuesday, April 22, 2008

Tax and Bookkeeping Tips

No matter what kind of business you operate, keeping financial records is probably not what you do best. You would probably rather spend your time selling your product or service. However, if you are going to run a successful business, accurate and timely financial information is a must.

Here are some of the reasons why you need a good record keeping system.
  1. Monitoring the success or failure of your business: It is hard to know how a business is doing without a clear financial picture. Are they making money? Are sales increasing? Are expenditures increasing faster than sales? Which expenses are too high based on their level of sales? Does some expenditure appear to be “out of control?”

  2. Providing the information you need to make decisions: Evaluating the financial consequences should be a part of every business decision they make. Without accurate records and financial information, it may be hard for them to know the financial impact of a given course of action. Will it pay to hire another salesperson? How much will another production employee cost? Is this particular product line profitable?

  3. Obtaining bank financing: A banker will usually want to see business’s balance sheet, income statement and cash flow budget for the most current and prior years as well as projected statement showing the impact of the requested loan. A banker may even want to see some of their bookkeeping procedures and documents to verify whether they run their business in a sound and professional manner.

  4. Obtaining other sources of capital: If a business has reached the point where they need to take in a partner or if they need capital and are thinking of taking in an outside investor, partner/investor will want to become familiar with business’s financial picture. They will need to produce a list of financial information they need. Even their supplier and other creditors may ask to see certain financial record as well. Such information may be produced by their outside accountant but it is based on their day-to-day bookkeeping.

  5. Budgeting: All businesses should use a budget for planning purposes. A budget will help keep all businesses stay on track by forecasting their cash needs and helping them control their expenditures. In addition, if they are seeking bank financing or other sources of capital, a banker or prospective investor will probably want to see their budget as evidence that their business is well planned and stable. They must have solid financial information to prepare a meaningful budget.

  6. Preparing income tax return: Whether a business is a sole proprietorship, partnership or corporation, they must file an income tax return and pay income taxes. With good records, preparing an accurate tax return will be easier and they are more likely to be able to do it on time. Poor records may result in their underpaying or overpaying their taxes and filing late results in paying penalties. If their accountant prepares income tax return, poor records will certainly result in paying higher accounting fees. If their business is a partnership, not only will they have to prepare a partnership tax return but it also will pass directly to the tax return of each partner.

  7. Complying with federal and state payroll taxes: If your business has employees, they must be aware of the rules and regulations relating to payroll taxes. Payroll tax deposits must be made according to strict deadlines. Late payment of payroll taxes results in severe and unnecessary penalties. Also, they must file a payroll tax return every quarter which they must reconcile with the payroll deposits made during the quarter. Then at the end of the year, they are required to give their employees and the government W-2 forms which must agree with their quarterly payroll taxes. Sound bookkeeping practices will make compliance with all these payroll rules easy. Poor records will make it impossible.

  8. Submitting sales taxes: If a business collects sales tax from their customers, good records will make it easy for them to compute the tax due and prepare the required payments and reports.

  9. Distributing profits: If a business is a partnership, they will need good records to determine the correct amount of profits to distribute to each partner. If a business is operating as a corporation, they must determine the company profits that they will be paying out as dividends to the shareholders.

Source: http://www.berrigans-taxbookkeeping.com/

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