5 Questions You Can't Answer If Your Books Are A MessSep 25, 2023
About a week ago, the 2022 tax season ended.
Which means the year is almost over and it’s time to think about 2023 taxes and your 2024 outlook.
You might be saying to yourself that you have plenty of time.
After all, it’s only September.
But there are a lot of questions that need answers in the next couple of months:
- How much do you need to pay by January 15th for estimated taxes?
- What should your revenue goal for next year be?
- Which products and services are the most profitable?
- Do you need to hire people? Can you afford to?
- Can you afford to invest in new software or other assets to grow the business?
It’s hard to answer these questions if your financial data is incomplete.
Let’s explore a few of these questions:
How much do you need to pay by January 15th for estimated taxes?
Technically, estimated taxes should be paid on a quarterly basis, but many business owners don’t do this for various reasons.
However, it is important to make sure that you’ve paid enough taxes by January 15th to avoid underpayment penalties.
Do you know how much that number is?
The amount could vary widely depending on which method you use to calculate it. It’s best to consult with your CPA on this to get the most accurate estimate that you can.
The first thing they’re going to ask for is your financials for the year…if they aren’t ready, then any estimate could end up costing you in penalties and fees because you paid in too little, or you could end up paying in more than you needed to ahead of time to be safe.
Who wants to give the IRS more money than absolutely necessary?
What should your revenue goal for next year be?
This may seem like an easy question to answer, but there’s a lot of data that should be considered besides how much you’ve sold historically or what you have in the pipeline right now.
Understanding the costs related to providing your products and services is very important to determine what you’ll need to meet your new revenue goal.
- What is your inventory cost?
- What are your delivery costs?
- How about your direct labor?
- What is your total overhead?
- How much are sales commissions?
- Where do you hit capacity limitations?
Having timely and accurate financial data allows you to analyze the true costs associated with increasing sales instead of missing out on items that fall through the cracks.
Which products and services are the most profitable?
Are you thinking about making changes to your products and services?
Maybe you want to reduce the number of products you sell to concentrate your efforts, or you want to expand a particular service because you feel like it’s working well for you.
If your associated revenues and expenses are tracked appropriately, gathering the data you need for your analysis is pretty simple.
If you haven’t taken the time to structure your costs in a way that can be tied back to the revenue you want to track, this can be very difficult.
One way to do this is to use the class or department functionality.
You can book direct costs to a specific product line and then supporting department costs can be allocated in whatever way makes sense for your business. It’s all in how you set the data up.
Do you need to hire people? Can you afford to?
I mentioned capacity limitations in the last section.
Labor is one piece of that puzzle.
Payroll costs are typically one of the largest costs for a business.
When you’re wanting to hire, you need to understand how much it will cost to bring a new employee on board (recruiting, salary, training, benefits, etc.) as well as how much that new employee will be able to add to the top line.
Even If you know how much it would cost and how long it would take to get them up to speed, you still need to take cash flow into account to see if you can afford to hire them when you need to.
It’s hard to do this if you’re missing key pieces of information because your accounting data is incomplete.
Can you afford to invest in new software or other assets to grow the business?
Let’s say you want to move from QuickBooks to ERP software like NetSuite because you want to utilize more advanced functionality to grow your business.
There is a large investment in time and money for a project like this just to get it launched, and then there’s training and lost productivity as your employees get used to all the new processes.
Plus, all the changes that happen after launch because something doesn’t work the way you thought it did or you missed a piece of the process the first time around.
The same goes for investing in property and equipment.
You need to have the cash to pay for the project or the ability to finance it and be able to absorb the additional costs as the organization adjusts to the new changes.
You need a strong understanding of your financials to evaluate the efficacy and timing of a project like this. Messy, outdated books aren’t going to get you there.
There are so many more questions that we could cover, but these five should give you enough motivation to start getting your financials in order if they aren’t where they should be.
The good news is that small steps in the right direction can make big improvements in a short period of time.
Here’s how to get started:
- Write down why you want to get your financials in order. What will you gain by doing this?
- If you have a lot of changes you want to make, decide which ones will have the most impact right now and create a timeline for the others.
- Read my article My bookkeeping is really behind. What do I do?
- If you want help getting your financial house in order, book a call with me and let’s explore how we can work together to achieve your goals!