This article was written with the intention of helping small business owners ease stress at tax time, and gain an awareness of the power that understanding how to use their financials has in catapulting their business success.

By the time March rolls around, most small business owners are resigned to the fact that they have to file their taxes, so they begin the annual frenzied scramble to gather all of their documents, and somehow input all of the data accurately into their financial software system (we recommend QuickBooks Pro for 99% of small businesses), and rush off their completed balance sheet and profit and loss (P&L) statement to their tax CPA. Or in some cases, they hand deliver that infamous shoe box of receipts and other important documents to their tax CPA to do all the data entry. (By the way, this usually costs more in terms of tax preparation time than if you had an accounting professional provide “real-time” bookkeeping services throughout the year and then deliver complete financials to your tax CPA… food for thought).

March 15th is tax deadline for S-Corp

April 15th is tax deadline for personal and for single-member LLC

As these dates come into our rear view mirror, we either have our information filed or we file an extension. Either way, I’m here to say that there is an easier and less stressful way to get your taxes handled that is also highly beneficial to the growth and stability of your business.

Here goes…

1st Step – It is imperative that Small business owners understand the difference between Financial Accounting and Cost or Managerial Accounting, and how it affects their stress level and the success and profitability of their business. If you’re scratching your head on this one, then listen up because understanding this key distinction has the power to transform your business. Let me begin a few steps back…

Most entrepreneurs think that the only reason why they need financial statements (Balance Sheet & Profit and Loss) is to file their tax return. Wrong! Actually that’s the least important use of business financial data for small business owners. Some of you might be scratching your heads again, saying “What could be a more important use of financials than filing my taxes?” How about using your business financials as a tool to GROW YOUR BUSINESS, and to ease the financial stress that often comes at tax time?

Allow me to share an example. Your business plan is to a business owner (you), what a map is to the captain of a ship. Get it? Your business plan charts the course of your business. Now think of your financials as your compass. Savvy business owners use their financials to keep them on course, to alert them when they’re too far east or too far west, or are about to run their ship aground. You might be saying to yourself “Ok, so understanding my balance sheet and P&L will ease financial stress and help me grow my business?” Well, yes and no. The first thing to know is that a business owner’s “financials” encompass much more than just a balance sheet and P&L. This is where we get into the differences between financial accounting and cost or managerial accounting. 

Financial accounting is really designed for the intention of having outside people look at financials for some business purpose. For example, if a business owner is seeking to raise or borrow money; the investor, lender, or board of directors would want to see their “financials”, their balance sheet and P&L. As we discussed previously, your balance sheet and P&L are also what a business owner uses in filing their taxes every year. These types of financial reports are designed for looking at a business from an enterprise level, or a 10,000 foot view. THEY DON’T TELL THE WHOLE STORY THOUGH, and they’re not the most useful reports for a business owner to use on a day-to-day basis to run their business more effectively.

Unfortunately in the small to even mid-size business community, financial accounting is usually the extent of understanding for most small business owners, and that is part of the reason why sadly enough, most businesses fail in the first 3-5 years. The number one reason for a failing business is improper cash management, and when all a business owner is doing with their financials is a mad dash at the end of the year in order to file their taxes, there isn’t much time spent on managing cash flow. In misunderstanding the full scope of utility and the proper use of business financials, most business owners are missing out on the enormous benefits of understanding their business on a whole new level through cost or managerial accounting.

See, cost or managerial accounting is where we get into the actual use of the financial data. Let me give you just one simple example. Let’s say you have a company with multiple product/service lines, and those product/service lines all have different profit margins. Your accounting professional brings to your attention that one of your lines is running at a very slim profit margin and is dwarfed by other product lines with healthier profit margins. You also notice that in another product line, although it provides a decent profit margin, you’ve noticed that it creates a lot of customer service issues that you’ve found consumes considerable time and resources. Knowing this information empowers you to make these tough day-to-day decisions in “real-time”. In this case, you would probably decide to discontinue the non-performing (low profit margin) product/service line and closely monitor the problem line for a period of time and determine if there are process improvements that can automate or otherwise alleviate the customer service drain. Doesn’t it make it easier as a business owner to see exactly what to do next in making these difficult business decisions when you have this compass?

Cost and managerial accounting is really more of an art than a science. How you decide what kind of report you want to look at depends on your unique business. More than that, it depends on how you specifically think about and analyze your business. If a business owner wants to understand how much payroll or salary they should be paying as an expense, or which product/service lines are most profitable and therefore deserve more marketing dollars, then they want to run reports that specifically provide that kind of information in order to make better decisions in these areas. All of these types of reports that I just described whether you’re a product based business or a service based business are all in the realm of what we’ve called cost or managerial accounting.

In essence, cost and managerial accounting provides the kind of data that business owners really want, and has the power to make enormous differences in the success or failure of a business. This awareness also creates an empowered business owner and results in a decrease in financial stress.

Here’s the kicker. It is really important for business owners to understand that a business owner can only get to the cost and managerial accounting data AFTER you’ve completed the first step of getting the correct financial data into QuickBooks (after financial accounting is complete). Further, the value of any report created is only as good as the accuracy of the data input. Ongoing bookkeeping support from an accounting professional throughout the year is critical for small business owners in order to have a.) accurate data (financial accounting), and b.) timely reports providing useful data for making key business decisions in “real-time” (cost and managerial accounting).  

Now this is quite concerning because as we discussed earlier, most business owners only prepare financials to complete their tax return at the end of the year. With this lack of knowledge, these business owners unknowingly go the entire year without any financial data to help them make critical business decisions on a day-to-day basis. What a missed opportunity!

Now that you understand that maintaining your financials throughout the year is critical for any serious business owner, what is there to do now? Firstly, you need to be sure you are using QuickBooks. If you’re going to be in business, you’ve got to have the right tools. If you were a carpenter, you’d get a hammer right? If you don’t know how to use it, then you can get support in a “QuickBooks Set Up and Training” from a CPA MOMS™ licensed accounting professional. They will help you get organized, and set you up for YOUR specific type of business (remember I said that each business requires unique financial reports specific to the business and even more specifically, how the business owner thinks about their business). CPA MOMS ™ can even teach you the 20% of functionality in QuickBooks that you actually need to know in order to get 80% of the results. You don’t need to be a QuickBooks Pro to maintain your own books. More on this topic of “When to Know When to Leverage Your Bookkeeping to a Professional” in a later post. For now, embrace the power that is inherent in knowing how to use your financials. Contact CPA MOMS™ today for a free consultation with a licensed professional CPA.

CPA MOMS™ matches licensed CPAs nationwide with Business Owners seeking high quality Bookkeeping Services at an Affordable Rate right here. CPA Services at Bookkeeper Prices since 2008.