Why a positive tax return could be negative for your business

June 25, 2020 Why a positive tax return could be negative for your business

Just because you receive a positive tax return doesn’t mean that your business is tracking well.

In fact, your tax situation is only one small but important aspect of your business that a good accountant will help you assess. As business owner John found out to his cost recently…

Meet typical business owner, John…

John’s flat out running his business and pays a bookkeeper to look after all the bills and paperwork.

The only time he sees his accountant is to sign his tax return and financial statements. Seeing him at any other time is a waste of his valuable time and money. In fact, John has cancelled his appointment with his accountant three times already this month.

He’s sure that he’ll just be told that he must pay more tax. He’s not sure why he still uses the same accountant because he seems to pay more in tax and accounting fees every year.

John’s thinking that maybe he should change accountants… George is always telling John how he has the best accountant because of how big his tax refund is each year and because he’s so much cheaper.

A positive tax return

John decides to see his accountant one last time. He arrives at the office and is very quick to point out that he’s super busy and just needs to know where to sign and how big a refund he is getting. To his surprise, he is getting a positive tax return.

But his accountant stops his celebration and asks: “John, do you understand why you are getting a refund?”

At this point John doesn’t care why. He is just excited not to have to pay any more tax this year, and it’s nice to get something back for a change.

John smiles and says, “You must be getting better at finding deductions”.

“Yes, you could say we found more deductions. But the reality is that your business is making losses and you’re going backwards. Your refund is because you made profits in the last few years and have being paying instalments of tax based on those profitable years.

“But this year, you’ve made a loss. In fact, your financial statements show there are some very dangerous things happening to your business.”

Is your business like John’s?

John is busy because he’s selling more, which can be a good thing. But he’s making less profit on each sale.

His costs are increasing faster than his sales revenue. His overheads have increased. Wages have doubled. The interest he paid is substantially higher because his overdraft has reached its maximum.

Customers are taking much longer to pay John and he has some invoices which are over twelve months old that probably won’t get paid. He’s drawing twice as much money out of the business for personal spending than he did when he was making a profit.

In the last 12 months, he’s only managed to make a profit in four months.  GST and wages are being lodged and paid late, resulting in fines and interest to the taxation office.

John’s business is out of control.

If this sounds familiar, take a serious look at where your business is at, where you want it to be and what needs to be done to change it.

Otherwise, one day you may end up like John, wondering how things turned so bad so quickly.

Regular accountant meetings can prevent future disasters

If you assume that everything is fine and your bookkeeper’s reports don’t need to be scrutinised by your accountant, you’re effectively working blind…and waiting for a disaster to arrive unannounced.

Your accountant won’t be able to help you prevent or navigate rocky patches in your business if you only meet with them once a year for your tax return. Utilise their expertise regularly throughout the year to assess your business’s performance.

Don’t be tempted to put off or cancel that meeting with your accountant. It’s important. Book a time to assess your business and, if necessary, determine the areas of highest priority to fix.

Almost every business owner needs help with improving sales and profitability, not to mention cash flow. And any good accountant should be able to help with this. If not, consider changing your accountant.

Don’t be like John and only see your accountant at tax time.

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