Many business owners are challenged with keeping up with their books during the year. After all, most entrepreneurs started their business to drive a passion forward, not become an expert on working with Quickbooks. As tax filing deadlines are getting closer, many small business owners are in a whirlwind trying to prepare and reconcile their books for the year. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Kelli Lewis to discuss how business owners can prepare for tax season.
In this episode, you will learn:
- Tips for tracking your income and expenses to prepare for tax season.
- Why having professionally prepared financial statements can help you learn valuable insights into your business.
- How the Chart of Accounts is used to gauge the overall financial health of your company.
- The importance of separating your business and personal finances.
- How using a bill pay service can help you free up time to spend growing and managing your business.
- And more!
Kelli Lewis: KelliWorks (201) 308-3128 | Bautis Financial: (862) 205-5000
We are in the middle of tax prep season and depending upon how your business is structured, you’re probably having to file by March 15th, April 15th or if you get an extension six months later. What should small businesses or businesses in general be doing now to prepare so that they can file on time when they need to?
I think it’s really important to look at the previous year and just make sure that everything makes sense and that everything is categorized properly. If you made any large purchases or maintenance. So really, it’s just fine tuning of things. That’s if you already have a set of existing books. And if you don’t, definitely contact a professional to help recreate the tax year so that you have all of your financials: your debits, credits and everything lined up.
You mentioned categorizing things, and you know it’s probably similar to how I like to do it on the personal side where you want to see where the family’s money is going. On the personal side it’s important because no one has an infinite source of money. You want to make sure your money is going to the things that are important to you and it’s funding your goals. On the business side that’s important as well. But also for tax purposes, business owners have to categorize expenses correctly to show where their money is going.
Absolutely. Even certain categories like meals and entertainment have to be created. I believe it was 2018 when they actually removed the entertainment category. So entertaining is no longer deductible. For a few years it was meals too. Now it’s only 50% deductible. Transactions really need to be categorized properly.
Are there standard categories that a business has to follow, Or can they make up their own categories?
Chart of Accounts
You have a standard chart of accounts in any accounting software that you’re using typically will come with default settings. From there you want to create categories that are geared towards your business and measuring expenses. You don’t want to create categories for every subcategory out there. I’ve seen businesses where they have overkill on their chart accounts.
What is the chart of accounts?
The chart of accounts contains information on your bank accounts, your liabilities, which are any loans that you may have or any debt outstanding. Then you have your assets. If anyone owes your business money, your accounts receivable, or accounts payable if you owe someone money. Finally you have your income categories, which are important. We’ll categorize that this front yourselves that then, if you’re also selling, fabric or upholstery, you only categorize that as fabric sales so that when you review your financials you know how much you’re making and each category. Then you also have your cost of goods sold, which is ultimately what it costs to sell your merchandise. Then you have your expense category, which is ultimately all of your overhead, and any dollar or penny that’s spent through the business should be properly categorized. We shouldn’t be lumping things or have reconciliation discrepancy such as miscellaneous. If money was spent, there should be a reason why and it should be properly broken down. You don’t want to overkill on the types of expenses with too many details because it’ll be really hard to just measure any money.
You can look at the chart of accounts as a financial dashboard or the health of the company’s finances.
Let’s say a company doesn’t use a professional. Are they creating all this in spreadsheets and or how does a company do this?
I see a lot of folks in Excel, but there’s incidentals, and that’s the reason why you really need to have a bank reconciliation so that everything is accounted for. Also QuickBooks online is used frequently. The QuickBooks online version is great and user friendly, and it really empowers an entrepreneur to look at their finances and track everything but having the expertise and knowing how to categorize things properly is important. QuickBooks will try to automate things and through that automation, we’ll see things improperly categorized or there might be some duplicates. It is ideal that if an entrepreneur is running QuickBooks online on their own, that at a minimum they have a professional going in one once per quarter to check some balances.
I would imagine most business owners don’t set out with the Golden Mind to start tracking their printer, toner, paper, etc. that they purchased and all types of things. You mentioned a couple things on the engagement with clients and how you work. I imagine there’s some people that come to you say, “I haven’t done anything for 2019. I’m gonna have to file a tax return soon. What should I do?” And in that case, what do you do? Do you recreate the year for them?
Yes, absolutely. My first question will be, “Where are you banking?” “How many credit cards are there?” “How many checking accounts are there?” Depending on which bank they’re with, that will help gauge a type of project, whether it will be more automated or more manual. We can recreate the year with just bank statements and I can go back as far as seven years through the bank records, unless we have copies of their statements if they’re older. Ultimately, that’s all we need.
Will some banks allow you to automate or pull in the transactions, or I guess the other option is looking at bank statements and manually entering each transaction. Are those the two main ways of doing it?
Yes, so when you’re with some of the bigger banks there is an import feature where you can see the information that went through QuickBooks.
What else does a business owner need to look at or do as they’re approaching tax season?
1099’s and W-2’s
It’s important to send out 1099s and W-2s, January 31st is the deadline for those. Also, sitting down with your tax preparer making sure that you’re on track for everything and that you’ve all of your interest statements from any of your financial vehicles and making sure that your paperwork is in order. Most people want to file by the due date, but I think that’s why an extension is out there. Find someone, hire them and they can take that burden off of you? October and September are the next filing periods.
In this case we’re talking about someone who just waits until the last minute to file, but I think with pretty much everything the more you plan ahead is better. So what throughout the year could they be doing? What could you be helping them out with? In terms of organization.
Typically my clients will retain me on a monthly retainer, so on a monthly basis I will provide financials, your profit and loss, balance sheet, any bills that need to be paid, any income that needs to be tracked, or invoices that you need generated. Each business is different so it’s really an a la carte service catered to the business but at a bare minimum we’re doing a reconciliation of all financial tools. Whether it’s the checking, money markets, I even have contractors who use petty cash. Whatever way the business is spending money and anyway the business is generating money, we get into that nitty gritty and make sure that everything is balancing out. We do that on a monthly basis, and we also have some other clients who aren’t as busy or don’t have that much going on so we can take care of that on quarterly basis.
So every quarter, every month, depending on how they engage with you, they’re getting some reports that they can look at and see the trends, the health of their business, and if it’s going in the right direction that they want. I think the one you mentioned, which is probably my favorite report for business owners, is that profit and loss report. They can see what’s coming in, where their money is going, if different expenses are trending up, what it costs to provide the product or service that they make or sell. You also mentioned bill pay, how does that work? Are you paying the bills on behalf of the company?
Bill Payment Services
Yes, depending on the logistics and the way that the entity is set up, there are a few different avenues we can pay those bills with. From regular checks or through the bank, or using bill.com.
I could see that definitely a time saver for the business owner because depending on how big business is it can be overwhelming you.
Yeah, that’s definitely where my passion is coming in and putting procedures in place to streamline. It’s even in large businesses. You will be so surprised to see the bill approval process. X might receive the mail and it might sit on X’s desk for some days and then, they have to get it to Y to sign, initial, stamp it and then scan it. I enjoy working with companies and really helping them see we can get from A to Z in a quicker way. In some smaller companies where cash flow won’t be an issue we set it up so we have a weekly or bi-weeky approval process where if cash is a little tight they will hold off on sending one payment out but process a different payment in the meantime.
Timing of the bills is important as well. I work with a lot of small business owners and one thing I see is them mixing their business side and their personal side. Do you see that as well? And what do you recommend the business owner do to rectify that?
I think it’s way more important than we think or than we know. The reason why someone will establish a corporation or an LLC is to create that corporate veil and to protect themselves personally. In the event that anything goes wrong, they’re breaking the corporate veil by using the card personally. Even if we just move away from taxes, deductible expenses, etc. by using your business card to buy a baby shower gift you’re risking way too much and it’s really not worth it. I encourage clients to bank at the same bank. When you’re standing on the checkout line if you don’t have the money in your personal account make a transfer because that’s cleaner. When I see the transfer leaving the business account to the personal, it’s a simple numbers draw and there’s no question about it. It’s really important to keep them separate, especially to see the growth of your business and trends.
There’s the legal benefit of keeping them separate and then there’s the aspect of being able to look at your business and determine a true sense of what’s going on with it. When it comes time to filing taxes it’s much easier, whether they use you or whether they do it themselves, to be able to know if something is deductible or actually a personal expense.
It’s important to be able to gauge your business and a lot of it is a learning curve. Entrepreneurs start a business because they found a passion around something they love and they should continue to do that and just hire a professional that will guide them. There’s no judgment if mistakes were made and it’s just about trying to do your best, clean it up, and move forward. Don’t overboard yourself trying to be an expert in every area
It comes down to organization and structure like you mentioned earlier. I promote it on the personal side with someone’s finances, and I always will say treat your personal side as if it was a business. You have to make sure your business is treated well. A couple episodes ago, we had Maria Diaz on and she is an organizer. It’s the same thing on her side, it all comes down to organization. She talked about organizing your house and the benefits of it. Outside of having your financials organized where it’s less stress and you can think clearer. This allows you to be a better business owner and be able to focus on the right things. Organization is definitely important . Do you have any tips for the person who hands you a box of receipts or doesn’t have any receipts? How does someone manage that over the year?
I think that now, in this day and age with smartphones they can scan and take a picture of anything. But there’s that thin, little small gas station receipt sized insert that can feed receipts through without jamming and you need to do that. I’d say baby steps and let’s keep receipts for larger purchases. But what I would say is no cash, because with cash it’s hard to recreate a set of books. I’ve dealt with landscapers before and they’re making purchases and paying some of their guys on a cash basis which I can’t even begin to recreate.
I can definitely see the importance of that for tracking purposes. One of the things you mentioned earlier was preparing these reports and also working with the tax preparer. You want everyone on the same page. How do you work with someone’s tax preparer?
CPAs and Tax preparer they’re great business partners for me. Typically they’ll have a client who they’ve been working for three years that comes to them a box of receipts or bank statements and their recommendation is that they need a bookkeeper. I would prepare all the financials and send them over to the accountant and the accountant will be super happy and we’ll go back and forth discussing different entries. Your books should match your tax return. A lot of CPAs, if they run a tight ship, they request that opening and ending journal entries balance everything out. I may also have a client who doesn’t have a tax preparer so at that point I pair them with someone that I know. I know a lot of different tax preparers and CPAs and some may specialize in restaurants, some specialize in individuals who have a tax debt so that might be a better synergy. Any other accounting or financial professionals is someone I would love to know.
One of the myths of working with the bookkeeper is affordability. I would imagine that having you prepare all these documents that makes it nice and cookie cutter for the tax preparer or CPA to work with is more affordable than having the CPA actually prepare it themselves.
A lot of times the CPA doesn’t want to do it. They don’t want to bill you all of those hours and recreate all of the necessary statements unless they have a bookkeeping department within the firm. I like to set my clients up on monthly retainers that we’re all comfortable with. It’s like a gym membership.
Is there anything else you think business owners should know about keeping accurate books and preparing for tax season?
I just say since we’re still at the top of the year, let this be the year you step out and reach out. You know, if it’s not to myself, it can also be another accounting professional. Get that burden lifted from you this year. I think you’ll see that not only taxes will be streamlined, but even throughout the year I think you’ll have a better handle on what you’re doing and how business is going. You’ll be able to see if there needs to be any changes made by cutting back in a certain area or maybe hiring someone new. I think that the one takeaway is to reach out to someone. Get your books in order. Your business deserves it.
It’s important. They should be focusing on the things that they can add value to which is their business, not maintaining their books and records of the business.
What’s the best way that someone could reach out to you?
My website is kelliworks.com. My email is [email protected]. We are located at 2000 Morris Avenue Suite #1 in Union, New Jersey 07038 and the office number is 201-308-3128.