Crap – We Made Money

October 9th, 2008 Chris Posted in Financial | No Comments »

We just closed out our fiscal year last week. We had a good year thanks to my uber-saleschick partner.

I was feeling great, purusing our Quickbooks-generated income statement showing some profit and a healthy increase in sales year-over-year. The one last thing to do to wrap a bow on things was to figure out how much we owed in taxes.

Now, I’m sure our tax regime is different in many ways from other places, but there are some constants. We pay business income tax and do so in installments throughout the year. So at the end of the year, you’ve being paying income taxes all along so everything will be OK. Right?

Well, it turns out that you are paying your tax installments based on your previous year’s results. So at the end of a given fiscal year, you look at what you paid in installments and compare that to your final tax bill based on your actual results.

If things don’t change that much, then life is good. You may have to pay a bit or get a bit back. But if things change – especially for the better – you are in for a rude surprise.

So I popped off a preliminary view of our results to our accountant and asked him what our tax bill was going to be. He wrote a very nice note back, congratulating us on our results and indicating that our tax bill had risen by 1000% from last year. Yes, dear reader, my finger did not get stuck on the “0″ key.

Turns out we had gone from breaking even to making some profit. And of course, I had failed to consider that when the cash was coming in. So, here we are at the end of the year with a big tax bill that we hadn’t been saving for.

Now, luckily, our tax bill doesn’t have to be paid for another couple of months so we have some time to scrape together the cash so we’ll be fine.

And we also have a great accountant, Nick. He’s helped us with strategies to deal with our lack of planning. Things like how to defer revenue – that is to not count sales you make in one year when you’re delivering the product or service until the next. And how to increase your expenses in one fiscal year by paying yourself a bonus in the next. Note: every one’s situation is different – speak to your accountant.

The real lesson learned is that you need to look at your financial progress along the way, at least once a quarter, and do an ongoing assessment of your tax situation. If sales and profits are up, stash away cash for your tax liability so you don’t get surprised by a big bill.

C.