Tax Tip Thursday

I have talked about mid year reviews and their importance many times.

I have started developing a more comprehensive approach to this now that we have Gold and Silver packages for clients to choose from when they get their taxes done.

I thought we could touch on some of the important aspects of running your business and knowing where it stands more often than just tax time.

We are halfway through the year—which makes this a perfect time to ask an important question:

Do you actually know how your business is doing?

And I do not mean, “There seems to be money in the bank,” or “Sales feel busy,” or “I think we are doing better than last year.”
Those are extremely typical responses to my question to clients, how is your business doing this year.
I mean: do you know, based on accurate financial information, whether your business is profitable, whether your expenses are under control, and whether you are on track for the year?

And part 2 of the question is have you set aside money for your taxes?

Do you know what your personal, Corporate and HST liabilities are right now?

A mid-year financial review is like a medical checkup for your business but it is also a VERY important planning tool!

You may feel fine, but that does not necessarily mean everything is fine. And if there is a problem, it is much better to discover it in July than after the year has already ended.
Here are some of the most important things a mid-year review can tell you.

First: Are your books actually up to date and accurate?

Before you make any decisions based on your financial statements, you need to know that the information is reliable:
• Have all the bank and credit-card accounts been reconciled?
• Have sales and expenses been entered?
• Are customer deposits recorded properly?
• Are payroll liabilities, HST, and other government accounts correct?

Business owners often look at their bank balance and assume it represents profit. But the money in the bank may already be needed for HST, payroll deductions, supplier invoices, loan payments, or income taxes.

Cash in the bank is not necessarily profit—and profit does not always mean you have available cash. A mid-year review helps separate those two concepts.

Second: Are you actually making money?

Your sales may be increasing, but are your profits increasing?
A business can be busier than ever and still make less money. Material costs may have increased. Wages may be higher. Subcontractors may cost more. Advertising may no longer be generating the same return.
The key question is not just, “How much did we sell?” It is, “How much did we keep?”

Compare your year-to-date sales, gross profit, expenses, and net income with the same period last year. Then compare those results with your budget.
If sales increased by 15%, but expenses increased by 25%, you may be working harder without becoming more profitable.

Third: Which products, services, customers, or locations are profitable?

One product line may be doing extremely well while another is losing money. A large customer may generate impressive revenue but require so much staff time, rework, discounting, or collection effort that the account is barely profitable.
A mid-year review gives you an opportunity to examine profitability by product, service, department, location, or customer.
Revenue is attractive—but profitable revenue is what pays the bills.

Sometimes the best decision is not to find more customers. It is to improve your pricing, discontinue an unprofitable service, or stop doing work that consumes resources without producing an adequate return.

Fourth: Is your pricing still appropriate?

Many businesses set their prices and then leave them unchanged for years.
Meanwhile, wages, rent, insurance, utilities, supplies, software, fuel, and financing costs continue to rise.
If your costs have increased but your prices have not, your profit margin is slowly disappearing.
The midpoint of the year is a good time to calculate what it actually costs to deliver your product or service. You can then determine whether your prices still provide a reasonable profit.
Even a small pricing adjustment can have a significant effect. If the additional revenue does not require much additional expense, much of that increase may flow directly to the bottom line.

Fifth: How healthy is your cash flow?

A profitable business can still run out of cash.Look at how quickly customers are paying you. Are accounts receivable increasing? Are some customers consistently late? Are you paying suppliers before you collect from customers?
You should also look ahead. Are there large tax payments, insurance renewals, equipment purchases, seasonal slowdowns, or debt payments coming later in the year?
A cash-flow forecast allows you to identify a potential shortage before it becomes an emergency. That gives you time to collect receivables, reduce spending, arrange financing, or delay a purchase.
The worst time to ask a bank for help is usually when the business has already run out of money.

Sixth: Are there any tax surprises developing?

For me, this is the gold in the Mid Year Review
No business owner enjoys discovering at year-end that they owe much more tax than expected.
A mid-year review can provide an estimate of your annual income and the taxes that may result. It can also identify whether your corporate tax instalments are sufficient and whether your HST and payroll accounts are current.
It is also an opportunity to consider legitimate tax-planning decisions before the year is over.
Tax planning generally works better before year-end. After the year has ended, many of your options have already disappeared.

Seventh: Are there unusual or unnecessary expenses?

Reviewing your expenses line by line can uncover duplicate subscriptions, unused software, automatic renewals, excessive bank charges, personal expenses recorded in the company, or services the business no longer needs.
You are not necessarily looking to cut every expense. Some expenses help the business grow.
The real question is whether each significant cost is producing sufficient value.
Reducing waste by even two or three percent can make a meaningful difference to annual profit.

Eighth: Are you on track to meet your goals?

At the beginning of the year, you may have created targets for revenue, profit, hiring, debt reduction, or expansion.
The mid-year review is the time to compare those goals with reality.
If you are ahead, you can decide whether to reinvest, reduce debt, reward employees, or build your cash reserves.
If you are behind, you still have time to respond.
Perhaps sales targets need to change. Perhaps marketing needs to be redirected. Maybe hiring should be delayed, pricing adjusted, or spending reduced.
The purpose is not to criticize what happened during the first half of the year. The purpose is to make better decisions during the second half.
Finally: Meet with your accountant before there is a crisis.
Many business owners speak with their accountant only after the year is over, when it is time to prepare the tax return.
At that point, the accountant can report what happened—but may have limited ability to change it.
A mid-year conversation is forward-looking. It allows your accountant to identify problems, estimate taxes, test your assumptions, and help you plan the next six months.
Your financial statements should not simply be documents that are produced for the bank or the CRA. They should be management tools that help you run the business.

So, as we reach the halfway point of the year, ask yourself:

Are my books current?
Am I making the profit I expected?
Is my pricing still adequate?
Do I have enough cash for the next six months?
Have I prepared for my tax commitments?
If you cannot answer those questions confidently, it is time for a mid-year financial review.
Because the sooner you know where your business stands, the more time you have to change where it is going.

Come talk to us about your mid-year review! You can reach us at 905 862 2727 to make an appointment or you can google The Mad Accountant and you can make an appointment through my website.  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.