Are You Doing Your Fourth-Quarter Planning?
The final quarter of the year, already half gone for 2008, is arguably the most important time of year for proprietors of independent businesses. This is the time to be intimately involved with year-end tax planning and looking ahead to the coming year. This planning can't be ignored without risk of unanticipated tax burdens or surprise cash-flow constraints that can affect the coming year's operations.
Taxes receive primary consideration because of looming legal deadlines, potential cash outlays and the possibility of penalties -- not to mention data collection, interpretation of numerous regulations and the decisions to be made. Ideally, the planning for this year's taxes should have started immediately after last year's tax returns were filed. Few things in business life are more dismaying than reaching the end of the year and discovering that (a) quarterly estimated tax payments total far less than your tax liability and (b) cash flow and cash on hand are insufficient to cover the shortfall.
Beyond taxes
Looking ahead to 2009 should also include serious consideration of proposed capital spending, hiring plans and how changes in employee numbers might affect facilities and services, and anticipated changes in compensation and benefits costs. These and other considerations have significant cash-flow implications, reminding us that financial management problems loom large among the reasons for small business failures. In the final analysis, cash is king: Many companies that have appeared solvent on paper have gone under for lack of cash.
Whether done in-house or with the help of a certified public accountant or other professional, planning ahead cannot be put off or ignored without serious consequences. It is not only taxes that can comprise the heavy price to be paid early in the new year for failure to examine the books in detail and think about how the company is likely to fare for the rest of this year and the first quarter of next year. A CPA or tax consultant can provide considerable constructive help before the year ends, but after Dec. 31 there's little either can do to alter the financial implications of the year's decisions (or non-decisions).
Looking ahead
The best fourth-quarter planning looks at the entire business not only leading up to the April tax deadline but also beyond. Some financial experts suggest at least six months, projecting the company's likely financial situation out to mid-year so that better decisions re possible not only concerning taxes but also about running the business overall. Balance sheets and income statements for recent years should be examined. Balance sheets reveal cash flow, and income statements help determine the extent of profit that might be achieved. If analysis reveals, for example, that a healthy profit exists by year end but that the first quarter of each year has historically proven to be a slow period, it's probably time to put the brakes on non-critical spending and lay cash aside for the anticipated lean months.
Some independent business operators, especially those who started as sole proprietors or one-or-two-person employers, have tried to stay on top of cash-flow concerns and tax returns without professional help. However, regulations have become so numerous and complex that we might justifiably adopt the well-worn precaution, "Don't try this at home." Business owners often make the same kinds of mistakes made by individual taxpayers -- forgetting to sign returns, failing to supply all required schedules or committing mathematical errors. And business operators face additional pitfalls, especially since information going into one year's return can be dependent on previous years' returns (depreciation, for example).
E-filing
Providing another reason for being well organized prior to tax time is the Internal Revenue Service's requirement for a growing number of smaller companies to adopt electronic filing for tax returns and related forms such as W-2s and 1099s. So far this requirement has not worked its way down to most independent businesses -- the government's idea of a "smaller business" is considerably larger than most independent businesses. However, filing electronically is an advantage for most businesses. Doing so isn't complicated; some businesses are doing it as a natural outgrowth of compiling returns using tax-preparation software. Even a sole proprietor using a Schedule C attached to a Form 1040 can benefit from e-filing.
Planning always involves some uncertainties; after all, planning is the process of deciding what to do in a time period that hasn't yet arrived. But whether looking ahead at what the tax situation might be or attempting to predict next year's production or sales, there is always value in planning. Don't try to accomplish fourth-quarter planning when that quarter has already become history.