Cash flow is one of the most important metrics that a business can monitor. If you know your cash flow, you can handle unexpected tax implications, invest with confidence and manage your taxes properly.
Understanding Tax Implications on Cash Flow
Cash flow and taxes are intricately attached to one another. For example, if you have to pay 30% more in taxes than you forecasted, you need to take some of your cash flow to make the payment. Otherwise, you may need to seek external funding to cover your tax liability.
You’ll also find that some methods of depreciation will reduce your operational cash flow. If you decide to deprecate equipment, you may lower your tax burden, although you need to use cash to make the capital investment. Often, reducing taxes means spending cash flow. If you plan your tax payments properly, you may even be able to improve your cash flow.
How to Plan for Tax Payments and Cash Flow?
Reducing tax liability must be done strategically, and there are a few ways you can begin using your cash to reduce your taxes:
Using Cash Flow to Reduce Tax Liability
If you use a tool like cashflowfrog.com, you may find that you have more cash flow than you need to keep operations running. What can you do with this cash to reduce your tax liability? A few things:
- Buy equipment: Do you need new equipment? You can write off the payment for equipment and may be able to depreciate the expense over time. Depreciation allows you to reduce a portion of your tax burden this year and in subsequent years.
- Hire workers: Cash allows you to hire more workers, which is an investment in the growth of your operation. You’ll need to pay for things, such as salary and benefits, but you will pay less taxes in the future.
- Buy more supplies: Cash can be leveraged to pay for more supplies, even if you don’t need the goods now. You can make a big upfront purchase today, negotiate a lower price with the vendor and lower the current year’s taxes. However, you need to be sure that the supplies will not expire or be bad before you use them.
- Invest in research and development: Research and development may be part of government programs, allowing you to further reduce your tax burden. You may receive tax credits for investing in certain forms of research and can also write off some of the expenses, too.
Cash can sit in your business’ bank and be used in the future if your company’s sales slow down. You must spend some of your cash if you want to reduce your taxes. It’s up to you and your accountant to understand if the expenditure is worth the tax reduction that will follow.
You’ll need to keep pristine records if you want to lower your tax implications in the future.
The Importance of Accurate Record Keeping
Record keeping is one of the recommendations from the IRS, which states that keeping good records allows you to monitor the progress of your business. The progression of companies goes through ebbs and flows, and record-keeping can benefit your operations in a few ways:
Businesses should work to grow their entities. Growth takes time and you need a way to monitor your operations. Record keeping empowers business owners to:
- Review books
- Learn if your operation is growing
- Identify business operations that need improvement
If you keep strict records, you’ll find that you can quickly review the books to learn if your company is growing or contracting.
Generate Accurate Financial Statements
Your financial statements at the end of the year may be easy to generate or difficult. Good books make it easy for you to prepare your statements and then close out your end-of-year accounts.
Accountants appreciate it when a company manages its records properly because it reduces the risk of audits and provides an accurate assessment of your business’s health.
Separate Expenses and Income
Accurate record-keeping makes it easy to keep your income and expenses separate. You can keep this division with the following:
- Payroll records
Organized books will help you keep everything in order and avoid mixing personal and business finances.
Deduct More Expenses
Record keeping is a tedious process, but it will also save you money in the long term. Your diligence will allow your accountant to reduce your taxes by ensuring that you take every tax deduction possible.
Tax officials will scrutinize your tax returns and look for fraud and errors. If you have accurate records, you’ll be prepared if you receive an audit in the future.
Reducing tax liability is important for every business. If you want to improve your cash flow, reduce your taxes. You can begin tax planning right now to lower your liabilities in the future. Working with a tax professional can help you reach this goal.