Written by Jenny Okonkwo
For many small businesses, the income tax filing process is an overly complicated, time consuming process due to the following reasons:
Poor Record Keeping
What cannot be supported or proved, gets added back to taxable income. Incomplete records is probably the No 1 reason why in many cases, small businesses may be parting with more of their hard earned income than they need to.
Limited Cash Management/Expenses Tracking
Small businesses often do not have the time or capacity for consistent cash monitoring. Poor record keeping is likely to leave them exposed to higher income tax liabilities which become a challenge to settle without adequate funds. Also, at the end of the tax year, it becomes a ‘guessing game’ as to how best to categorize and allocate the expenses.
No Budgeting and Forecasting Processes
The use of budgets and forecasts help to profile a business in terms of targeted revenues and expenses. They could be useful as a basis for helping to validate the completeness and accuracy of the actual books and records as a basis for tax calculations.
Lack of month end procedures
Month end procedures encourage a level of organization in maintaining the business books and records. The result is cleaner book-keeping to ensure the correct transactions are posted in the corresponding period in the accounts.
Here are some suggested actions to alleviate some of the pain during the tax filing process:
- Move away from the ‘Shoebox’. Develop a filing system so that you are able to immediately access invoices, expense documents, store till expense chits / receipts, bank and credit statements by month
- Watch the Cash. Aim to have your suppliers on longer payment schedules than your customers if at all possible. Who wants to take out a loan to pay their taxes?? Open a separate bank account and put aside the HST / Income tax estimate of your revenue as you receive it
- Introduce month-end procedures. As mentioned above, this will force you to improve your record keeping
- Build a yearly budget, and flex it monthly, based on what actually happened. This will help you to stay on track with expenses and highlight areas that require urgent action
- Buy in the expertise for ‘x’ days per month to help you get organized with the above responsibilities which then allows you to focus on the core activities of your business
- Separate your personal and professional expenditure. Use a separate bank account and dedicated credit cards for your business, for easier tracking of revenue and expenses.
Despite the above, some of you may choose to stick with the ‘Shoebox Method’ of managing your business finances. If so, may I recommend that you install some type of ‘navigation system’….that way, come tax time, you’ll actually know where the Shoebox is!
If you are spending too much time away from your main business activity to manage your accounting and record-keeping tasks, contact me for a free consultation on how we can reduce your workload and lower your costs, firstname.lastname@example.org or 647 838 9606.