Episode Transcript
[00:00:30] Speaker A: Welcome to Balancing act, your guide to grow, profit and scale. I'm Linda Hamilton, a CPA, and for the past 30 years, I've been looking under the hoods of businesses to uncover what truly drives success. This show is different because we know the numbers matter, but the story behind the numbers matters even more. So many things impact profitability and growth, but it's about striking a balance. So today we're going to talk about financial fluency. I use the word fluency, not literacy, because it's about language. What is the language of your numbers? What is the story your numbers tell? Why is this a problem? So many businesses are stuck on how to grow.
[00:01:21] Speaker B: They. They don't know how to grow.
[00:01:22] Speaker A: They don't understand how much cash they have or profit they have. And I think a little part of that is a lack of financial fluency, understanding that that creates a pain point. You go to your accountant, they tell.
[00:01:35] Speaker B: You you have taxes to pay and.
[00:01:37] Speaker A: That you had a profit, and you say, I don't know where the cash is, what is my profit? So it really does matter that we understand what numbers are telling us. And today with us, we're going to have Alana McNicoll, a CPA and MBA, and the tax practice director for our firm, and she's going to help us unpack these financial statements. So you know where to start. Alana, thank you for coming on today.
Let's start with the balance sheet. How does that impact financial fluency?
[00:02:10] Speaker B: What does it mean?
[00:02:12] Speaker C: Thank you, Linda. So happy to be here. And I love that we're talking about language and stories because the balance sheet is telling a story about your business. And it's so important for you to understand that story because other people want to understand that story, too.
[00:02:27] Speaker D: Right.
[00:02:27] Speaker C: The balance sheet and all your financials aren't just sitting in the hands of you as the business owner. They're going to different places. So it's. It's really critical that you understand the basics of what is on a balance sheet and what yours actually means.
So I think we should lay out the sections of the balance sheet so you can understand sort of top to bottom, what parts are listed on this form and what do they mean to you. So, Linda, I'm going to start with the top of the balance sheet, which are the assets. Right. Assets is basically either everything you have or everything you're entitled to.
And of course, we know cash being the biggest, most obvious asset when we're looking at any balance sheet, but that also includes other things like accounts receivable and inventory so those numbers are really important because you want to make sure that those are correct.
[00:03:24] Speaker D: Right.
[00:03:25] Speaker C: That the balance sheet. Yes, that's the money I have in the bank. Yes. That inventory number matches what I know is in the warehouse. Linda, you and I have been practicing for a long time. I'm sure you've picked up a balance sheet and taken a look at that asset set section and come back to a business owner with questions.
[00:03:42] Speaker A: Exactly. And I'm glad you put it that way about the story of it going out to others, because, you know, one thing is business owners, you know, most of them will go and look at their profit and loss statement or their income statement, but many people, they just don't look at a balance sheet. What is a balance sheet? I have no idea what this report means. And it is a report that's generated from your account accounting software. It's also on your tax return. So, Alana, you mentioned that this report will go to others. For example, who else will look at your balance sheet?
[00:04:18] Speaker C: Yeah. So, I mean, I think a third party, like a banker, is really one of the most important relationships that you as a business owner have.
[00:04:30] Speaker D: Right.
[00:04:30] Speaker C: You've got this balance sheet. It's telling anybody, hey, here are the assets of the company, Here are the liabilities of the company. If you are looking for funding, if you're looking for working capital, those financials are the first thing that any third party is going to ask because they're going to want to know, hey, what is this company really worth?
[00:04:48] Speaker D: Right.
[00:04:48] Speaker C: And the balance sheet is a big part of that. And I think the worst position you can be in as a business owner is to realize that you need something like a balance sheet. Right. You need a record that shows, yes, these are the assets of the company and these are the liabilities of the company. And it's not complete or it's not. It's not a total picture of what's really going on in your company. And at that point, if you're already in the mix trying to look for something like working capital, you may find that you're in a. That you're in a bind. You're scrambling to get these numbers to be accurate. I was working with a business owner last week. We pulled up her financials. That balance sheet said that she owed payroll taxes in the amount of $45,000. And I said, that doesn't really sound right. And she said, no, that's definitely not right. But imagine the position that you would be in as a business owner if you thought to yourself, hey, these Books are done and somebody else picked it up and saw something like that.
[00:05:46] Speaker D: Right.
[00:05:47] Speaker C: So that we talked about assets a little bit. Liabilities. On the other side to the balance sheet, what do you owe and to whom? And when is it due? Right. You have.
You have liabilities that are due now. You have liabilities that are due in the future.
[00:06:00] Speaker D: Right.
[00:06:00] Speaker C: But all of those things kind of sum to numbers that are really, really important now.
[00:06:06] Speaker A: And so let's step back for a minute.
[00:06:07] Speaker B: I don't have an image to show.
[00:06:09] Speaker A: You of balance sheet, but if you imagine for a moment a report that on the left of the page are this sum of assets Lalana mentioned, you know, cash in the bank, accounts receivable. That means what people owe you, what do your customers owe you on that? And it might have some computer equipment in there. And then on the left it'll have total assets. And on the right, what we'll have is. And I realize maybe I'm a little backwards here, we'll have liabilities and equity. There's actually a formula for a balance sheet. It does balance. So assets, what you own are equal to liabilities plus your equity in the company. So, Alana, let's talk for a minute about when we see liabilities maybe that don't change.
I always tell business owners to actually open up. Just look at the report, start to look at it every month, see if it makes any sense to you, and start to ask your bookkeeper or your accountant to explain these numbers. But what happens with liabilities? A liability could be what you owe your printer, what you owe in rent. You know, you could owe different vendors money. What happens if those numbers aren't changing on your balance sheet?
[00:07:29] Speaker C: Yeah. So a great point to keep in mind is that a balance sheet is a snapshot of any one point in time.
[00:07:37] Speaker D: Right.
[00:07:37] Speaker C: When you're looking at the balance sheet, you're choosing a date to look at it.
[00:07:41] Speaker D: Right.
[00:07:42] Speaker C: So today I owe my credit card company $10,000. Well, if a month from now the same balance says $10,000, something's not working, Right. Things are. If your liabilities are not changing, that means they're either fixed and they never change, or there's something that's not flowing through the liabilities.
And so that can become really dangerous if you're relying on your books to tell you when things are due and who you owe.
[00:08:09] Speaker D: Right.
[00:08:09] Speaker C: So if those numbers, if they're not changing or they seem inaccurate, something is not working. The same client that I was looking at, her books, it said that the liability on her Credit card account was a negative $15,000. And so I said, oh, did you overpay your credit card bill by $15,000? She said, no, definitely not. Right. So again, something is not flowing through there. And it. And managing your liabilities translates directly to managing cash flow. I know we'll be talking about cash flow later on the show, but, you know, it's really those numbers you may sort of have in the back of your head, right? Oh, yeah, I owe. I owe my vendors about five grand over the next month. Okay. If that's how you're managing those numbers, that's fine. But are they on your financials? Does that back of the envelope match what's being recorded on your books?
[00:09:04] Speaker B: Right.
[00:09:05] Speaker A: And so let's think about that a little further. So this balance sheet is kind of the health of your company. The bottom line of the balance sheet is equity. That's what you, the business owner, owns in your company. Right. So what does that mean? So let's think about that. You had assets in one column, right, that are $100,000. And then on the other side, since the formula has to work, you. You have liabilities. People you owe money to, let's say are $60,000 and $40,000 is left over. That means that's your investment. Your creditors are funding you keeping these assets. That's a hard concept to get ahold of, and I understand that. And I never expect a business owner to really understand that right away. But over time, a business owner, if they start to look at this report, they start to recognize and notice things. And that's when you can say to your accountant or your bookkeeper, explain this number to me. How come it hasn't changed? It's the same number year after year or month after month. What's happening here?
You want to understand the health of your company and the bottom line of equity of how much is your investment in your company?
Alana, before we close out this segment about balance sheet, you know, because we'll talk next about profit and loss. How can people find out more, learn more about the balance sheet and why it's important for them to have an understanding of it?
[00:10:35] Speaker C: Yeah, definitely. I mean, ask your bookkeeper, pull up the form itself and have a conversation with your accountant.
[00:10:41] Speaker D: Right?
[00:10:41] Speaker C: I mean, that. That is your trusted advisor. Those are the people who, whose doors, you know, we should be able to walk through if we need to. And if you're still lost, you're still confused, feel free to drop on our. Our website or shoot email. We're happy to talk to you about these numbers and help you make sense of them.
[00:10:58] Speaker A: Exactly. And this report is the one that will really take you forward in the future, will improve the health and will help you make smart business decisions about growing your company. So we'll come back in a moment.
[00:11:11] Speaker B: Stick with us.
[00:11:12] Speaker A: Now Alana's going to stay with us and we're going to talk about the profit and loss or the income statement. I just want to close out by telling you the takeaways from this segment on Balance Sheet is look at it every month. Compare it in QuickBooks or on your tax return to last year. So look at this year last year. See if the numbers changed, see if they didn't change. Ask your bookkeeper or accountant to explain them. You will have a lot of insights there. And that report will be more accurate when you are paying attention to it because it is bookkeeping that causes it to be inaccurate.
[00:11:48] Speaker B: Stick with us.
[00:11:49] Speaker A: We'll be back in a moment.
[00:11:50] Speaker B: It welcome to BALANCING acts, your guide to grow profit and scale. I'm Linda Hamilton, a cpa, and I've been looking under the hoods of businesses to uncover what truly drives success for the past 30 years. This show is different because we know that the numbers do matter, but the story behind your numbers matter even more. So many things you do impact your profitability and your growth. It's all about striking a balance and really reeling that story. So today we're going to tackle financial fluency. I'm very much It's a new tax year.
We want to start with understanding why people are stuck. They're stuck on how to grow. Why is that? Because financial fluency is the language of your company. The language. What's the story these financials tell about how you've been your financial statements reflect the past. And if you want to grow your business, you have to know where you're going. Where do you want to go? How much profit do you want? How much growth do you want? People often chase growth. I want to grow. I want to double my revenue. I want to triple my revenue. But they're not necessarily looking at the profitability of that revenue. And that's critically important to be able to be successful in your business and to have enough money to do the things you want to do and to pay yourself a fair salary. So we're going to talk now about the profit and loss statement so that you can get unstuck and grow profitably. And we're fortunate to have Alana McNicol with us. She's an MBA and a CPA and the tax practice director of our firm, Linda Hamilton, cpa, LLC in New York City. Hi, Alana, how are you?
[00:14:15] Speaker C: Hi, Linda. Happy to be here.
[00:14:18] Speaker B: So this is a great time. Your profit and loss statement kind of resets. January is a new year. We could be talking about this later in the year. The concepts will be the same. But for now, we're starting on our new year. And as I just said, we. The profit and loss, it reflects what's happened in the past. And what can you tell us about how you help clients walk through a profit and loss statement?
[00:14:44] Speaker C: Yeah, well, January is here, but everybody's asking me, what am I going to pay in taxes? And that's all about last year. So now is a great time, of course, to look forward. But as Linda mentioned, you've got to understand the past in order to change the future.
So profit and loss is basically a snapshot of any period in time. What revenue did you recognize and what expenses did you incur? And so I think it's important to understand, Linda sort of alluded to it. Revenue, sales is the vanity number. Profit is the actual number that we care about, and it's the number that a third party would care about, like the banker, it's the number that the IRS cares about. What is your tax bottom line?
[00:15:29] Speaker D: Right.
[00:15:30] Speaker C: So a profit and loss, I think it's easy to sort of break it down into three or four sections.
Up at the top, we've got revenue, sales, income, gross. What did we bring in? Moving down a little bit, you've got cost of goods sold or direct costs. What were your direct expenses that you incurred in order to make those sales?
Below cost of goods sold, we've got a gross profit number. And then below that, you have other kinds of expenses that weren't tied directly to expenses of making those sales. Finally, if we slip all the way down to the bottom, we've got some other miscellaneous type items that aren't directly related to the profitability of your business. Hopefully I didn't lose you yet. I can see we've got those four points, but they are pretty easy when you break it up that way.
[00:16:23] Speaker B: Right. And I love that you said, you know, revenue definitely is a vanity number, and profit is what I call sanity, because you can have all the revenue in the world, and if it's not generating a profit, something is wrong. So you need to make sure you're charging enough. So that's one way you can look at, as you said, the. The revenue is at the top. Right. It's one of the Very first numbers. Sometimes that's all the, the only number you'll have there. Some of you might want to break that out a little more and say. Some people call it revenue, some people call it sales. It means the same thing. Some people sell products, some people sell widgets, tools, you know, some people sell services, fees. But whatever you're calling that, it's what you've charged your customers. If you don't have a profit, maybe you're not charging your customers enough to cover all your costs. So there are different kinds of profit. The first one you come to is actually what we call gross profit. Right. It starts with sales or revenue at the top, minus these costs that are directly related to selling. If you had no sales, you would not have these costs. It's cost of goods sold. If you sell inventory, you have to buy the products you sell to your customers. Maybe it's a cost of services like your team. Alana, how is it that when you look at gross profit, you know, you can look at it as a dollar amount or you can look at it as a percentage amount. How, how, how important is it for a business owner to actually understand that just that very top section of an income statement or profit and loss, both names mean the same?
[00:18:06] Speaker C: It is, yeah. I think it's really important to understand what exactly it costs to get those, those sales.
[00:18:12] Speaker D: Right.
[00:18:13] Speaker C: So, so how much, how much does it cost to get that inventory? How much are you having to pay your contractors in that you are selling? Right. Because it's those numbers at the top that you really can't do without.
[00:18:27] Speaker D: Right.
[00:18:27] Speaker C: In order to sell one widget, you've got to incur that cost. When we look about at profitability, it's the things below gross profit that we maybe can, can play with a little bit more. But, but the cost of your sales are really unavoidable.
[00:18:42] Speaker D: Right.
[00:18:43] Speaker C: So you want to understand that margin.
[00:18:45] Speaker D: Right.
[00:18:46] Speaker C: What is the net that I'm bringing in in order to, to sell one widget in order to, to close one contract.
[00:18:53] Speaker D: Right.
[00:18:53] Speaker C: Because that's really going to drive a lot of the other decisions that you make as a business owner in terms of what else you want to spend your, your money on that you're bringing in through those sales with, with those direct costs.
[00:19:06] Speaker B: Right?
[00:19:06] Speaker D: Right.
[00:19:07] Speaker B: And as you mentioned, subcontractors, so many business owners use what we call 1099 subcontractors. Right. They're not doing all the work themselves. They don't have employees this work out or partnering with someone else. So you really have to make sure you're charging enough, because what's left over is all that you have to actually be able to pay your other expenses to pay your own salary. Your over.
Yes, exactly. To operate. So those are important. Now you get to what we call expenses below the line. It's below that gross profit line, right? Revenue minus cost of sales or direct costs. You could think of them variable cost. Now you have gross profit. So below the line, what kind of expenses do we have below the line? Are they fixed? Do we have any discretion over them? How should we look at those costs or expenses, we might call them then?
[00:20:04] Speaker C: Yeah. So your expenses below the line, as we said, below that gross profit line, are really going to be more tied to what we call the overhead.
[00:20:13] Speaker D: Right?
[00:20:13] Speaker C: So if you have a receptionist salary, if you have an office space, right. That would be your rent costs and whatever it else it costs to keep those doors open.
If you have other kinds of administrative expenses, office supplies, you know, anything that's not tied directly to the, the, the item or the service that you're selling, we would call overhead.
[00:20:36] Speaker D: Right.
[00:20:37] Speaker C: And so here's where you can really, as a business owner, maybe get a little bit strategic when you're looking at moving the, the needle on that bottom line, doing something like evaluating, okay, what am I using this office for? Do I need to keep, keep the, the shingle open, right? The past five years has, has taught a lot of us, hey, maybe I can do things virtually who's doing what in. On the payroll, right? Where are those, where are those dollars being allocated?
And so, you know, this is, again, it's not tied directly to your sales, right. But it is coming out of that bottom, bottom line.
[00:21:14] Speaker B: And so we also talked about where do you want to go? So if you want to double your revenue, you say look at that sales number and double it. You have to understand what it will cost you to do that because you don't get to keep 100% of it. There's always cost, right? So you want to look at last year, and one of the most important things you can do, right, Alana, is look at this year compared, you know, 2024 compared to 2023. What changed? Are your sales trending upward? Did you lose sales? Are your expenses going up faster than your sales, which often happens? And you can look at those numbers as a percentage of your sales to see where you're going.
I just also want to make sure that people understand profit, right.
Is not necessarily cash. Right.
So we will talk more about that, but just briefly before we break what is that number we're looking at? How do we know if we're looking at a cash profit or a profit overall?
[00:22:24] Speaker C: Yeah, huge distinction there. And certainly the IRS really cares what that profit number is. Right.
I think it's important to understand that the drivers in the income statement are coming from things like invoices and bills.
[00:22:40] Speaker D: Right.
[00:22:40] Speaker C: So if you invoiced $500,000 worth of sales, but your customers owe you $250,000 of those sales, well, your profit's gone up, but the cash in the bank hasn't necessarily followed that. So a lot of business owners hit year end, they look at what their profit is, they're trying to budget for taxes and for next year. And those things aren't always necessarily aligned. So it is definitely important for you to understand the balance sheet, as we were talking about before, is connected directly to that income statement and we're going.
[00:23:15] Speaker B: To end with that. But it's really important for you to understand these numbers not by yourself. Talk to your accountant, talk to your bookkeeper, make sure somebody's looking at with you. Stick with us. We're going to come back and talk more about cash, about what is cash flow and how is it different than profit. Stay with us and we'll be right back.
Foreign welcome to Balancing act, your guide to grow profit and scale. I'm Linda Hamilton, a cpa, and I've been looking under the hoods of businesses to uncover what truly drives success for the past 30 years. This show is different because we know the numbers matter, but we also know that the story behind the numbers matters even more. So many things impact your growth and your profitability. It's about striking a balance between the two. So today we're going to focus on financial fluency. We've been talking about the balance sheet, different financial statements, the profit and loss. This segment, we're going to think about cash, what about cash flow? The problem is business owners think their profit is the same as cash. That's almost always true. So when they go to get their tax return done, sometimes they will say, what do you mean I owe taxes? I couldn't possibly have a profit. I don't have any cash. It is about the money and how things move in and out of your business. So it is critically important to understand that because many businesses fail within two years and actually more than 50% of businesses fail after even five years, oftentimes they feel they fail because they ran out of money. And so we want to make sure that you understand how not to run out of Money. How to monitor your cash flow along with your profit and grow successfully and profitably. Alana McNicoll, a CPA and MBA tax practice director for our CPA firm, is here to help you understand cash flow. Alana.
So we often have these conversations with taxpayers every year who say, what do you mean I have a profit? Where did the cash go? Where did the money go? So let's start talking about what's the difference? Is there actually a cash flow statement in QuickBooks?
[00:26:12] Speaker C: It's all about cash. As a business owner, we know that, right? It's cash is the lifeblood of your company. It is what is letting you keep the doors open. So, yes, we're looking for as much information about cash flow as we can possibly get. QuickBooks and whatever other accounting software you might be using definitely does have a statement of cash flows. And that is simply telling you what's coming in the door and what's going out the door.
[00:26:37] Speaker D: Right.
[00:26:37] Speaker C: At the end of the day, it's all about what are the sources of those money, that money, and where do you end up at the end of whatever time period you're looking at. And of course, we want the cash flow statement to be positive, right. We want your company to be generating enough cash that you have cash flow available.
And so that's the, the snapshot there, I think. A statement of cash flows, it is not one that a lot of business owners that I work with use, but the concepts are mission critical, critical and to just keep your doors open, period.
[00:27:12] Speaker B: Right, right. And when you think of cash flow, you're kind of thinking about the word flow, right? It's like, like water, lifeblood, like your blood flowing through your veins, right. You want the money continuously flowing through. When we were talking about the profit and loss earlier, you know, we were talking about sales. So a sale is a transaction, right? Transactions happen every day, every month. They just go on. You know, you have a sale, but you didn't necessarily collect on the sale. It might take you, you know, unless you're in retail, E commerce or in a restaurant where you get paid right away charged through a, through a credit card, you have to wait for your customers to pay you. So that means you made a sale, but there's no cash to match it right now. Right. And the same is true of your expenses. And one of those big gaps might be your vendors don't want to wait for you to get paid before you pay them if you need their help in advance. So how do you, how do you balance that or how do you Keep an eye on that.
[00:28:18] Speaker C: It is a balance. Yes. And I think it's the distinction that you made that sales don't necessarily equal cash immediately is one that's so important that I think oftentimes when you look at a financial statement, you think to yourself, oh, I sold 500 grand last year. I'm doing great again. Did you get that cash?
[00:28:38] Speaker D: Right.
[00:28:38] Speaker C: The statement of cash flows. If 500 grand came in the bank during that same tax year, awesome. You're in the money. You've got the cash to pay for that profit, Right. If half of those customers don't pay you until sometime next year, well, you're out of alignment here, right? So you do need to understand what payment terms are you offering your customers. Are you saying, sure, pay me in 30 days, 60 days. Are you basically extending credit to your customers?
[00:29:08] Speaker D: Right.
[00:29:08] Speaker C: And let's think about that. Do I want to be my customer's bank? Right. Maybe not. Small business owners might decide, hey, you know what? I'm charging half upfront.
And that is something that really, a small change like that, you might think, oh, my customers are never going to go for that. You'd be surprised. And that will just sort of ensure that you have this cash flow coming in more regularly at the time of a sale, right? And it starts to give you that ability to manage cash flow and then manage, you know, the other side to that, which is your payables, right?
[00:29:42] Speaker B: And you know, one, one of the most important things, sometimes when I teach my workshops for business owners across the country, you know, they will say, I don't want to accept credit cards. You know, there's a fee and I don't want to accept it. However, it's kind of like, you know, what if they charge you 3% and you don't have to chase your customers for money. You've already gotten the money.
There are numerous stories online about companies that go out of business overnight because they ran out of cash. So being able to collect your money as quickly as possible is the key to staying positive cash flow. That doesn't mean you don't have to have a profit. So, you know, profit year over year over year will lead to eventually cash as you collect it. Right? But losses will eat your cash, right? So that means that you have to be making sure what you're selling is also generating a profit. That's that fine balance between profit and cash. Because you can have cash without profit and you can have profit without cash. Both can be true. But you cannot have insufficient cash for a long time because Your business won't be able to survive that period because you have bills to pay. You have to pay yourself. So let's talk about just a little bit about cash basis and accrual basis accounting, because I think most business owners really report on cash basis. Right. That's what they know. They think what's in their QuickBooks file is all about, oh, I made a sale, I actually received it, or, you know, my expense happens when I paid that vendor. But then, you know, at the end of the year, they might not necessarily match up. Can you just go over it a little bit? Accrual basis and cash basis?
[00:31:40] Speaker D: Sure.
[00:31:41] Speaker C: So, and this has a very material impact on the way you, you, your income is taxed.
[00:31:48] Speaker D: Right.
[00:31:48] Speaker C: So if you're, if you are cash basis, then it truly is money hits the bank, it's taxable money goes out of the bank, it's deductible.
[00:31:56] Speaker D: Right.
[00:31:56] Speaker C: Subject to whatever jurisdictions you're in telling you what you can and can't deduct. But, but basically, you know, it's, it's whatever, whatever hits the, the bank account is what you pay tax on.
[00:32:09] Speaker D: Right.
[00:32:09] Speaker C: Versus accrual basis, which is truly. You recognize revenue usually when you invoice it, and you recognize an expense when you get that bill, whether or not cash has either come in the door or gone out the door.
[00:32:22] Speaker D: Right.
[00:32:23] Speaker C: So then you're sort of in the, in the mindset of, okay, whenever I invoice and whenever I get an invoice a bill, that is when I'm recognizing the profit and in theory, paying taxes on it.
[00:32:36] Speaker D: Right.
[00:32:36] Speaker C: So those are two very different ways of operating. They're two very different ways of thinking about your business.
And I think it's very easy to not understand that.
[00:32:47] Speaker D: Right.
[00:32:47] Speaker C: To have whatever back of the envelope method you have. And we all do, let's not kid ourselves. Every business owner out there has that back of my mind. Here's what's coming in and going out. Well, is that what is showing up on your tax return? Maybe, maybe not.
[00:33:04] Speaker B: Right, Right. And that's what's really so important. So what we're saying is you might not have a cash flow statement, maybe your accountant's not dumb one or a bookkeeper. That's okay. You still understand what's going in and out of your business. You could ask them to prepare one or at least help you to understand that. But you want to really know, not just for financial statements, how are we doing and where are we going, but what's going to be taxed this year and Understanding how you're taxed is critical.
This can be complicated, right? Cash flows, balance sheets, these things. We don't expect you to understand it all up front, but it's helpful to have a conversation, to have a bookkeeper or an accountant who's patient enough to help you understand what these things mean. Over time, they do get easier to understand. But one of the most important things I found over the years is those are on cash basis. I only have income when I receive cash or when I pay a bill and they do their tax return that way and suddenly they get this giant deposit in December that's for next year. They don't have any cost and they end up having to pay tax on something they don't understand why. So you really want to pay attention to your cash and how it impacts your taxes at the end of the year. This is important questions to ask your accountant. Alana, what questions should they ask? Can they reach out to you?
What other resources are available for taxpayers and business owners to understand cash flow?
[00:34:45] Speaker C: Yeah, I mean, cash flow I really think is tied directly to your receivables and your payables. So make sure you're having a conversation with whoever's keeping your books about the accuracy of those numbers. Have we invoiced all our customers? Have we gotten other all of our bills? Are there holes there that we didn't even think about? It happens very frequently that you didn't receive a bill that you thought you already paid and suddenly it's in front of you, oh, you owe this vendor 15 grand, whatever it might be.
So keeping an eye on those numbers is really important. Definitely having an open line of communication with your bookkeeper, your accountant. And if you don't have that, give me a call, send me an email. We'd love to talk to you.
[00:35:26] Speaker B: That's right. And thank you for staying with us. This segment. Just remember, if you want to grow, you have to know where you're going and that you have the cash to fund it as well. Stick with us. We'll be right back. And in our last segment, we're going to talk about tax returns. How do you understand your tax return?
Foreign welcome to Balancing act, your guide to grow, profit and scale. I'm Linda Hamilton, a CPA, and for the past 30 years, I've been looking under the hoods of businesses to uncover what really drives profitability and success. This show is different because we know the numbers are important, but the story behind the numbers matter even more. So many things impact your growth and your profitability. It's about striking a balance between them. And to help us do that, today we're going to talk to Alana McNicoll. We're going to tackle financial fluency, understanding your tax return, because if you don't understand your business tax return, you're going to be pretty stuck and have a lot of surprises. Alana, what is let's tie a relationship for our audience on how a tax return relates to their profit and loss statement.
[00:37:18] Speaker C: Yeah. Great question. First of all, we're talking taxes. Take a breath. They're not as scary as you think they are. We promise you, it is so important to understand what is on your tax return and how it relates to those financial statements that we were talking about because they're not always the same.
[00:37:36] Speaker D: Right.
[00:37:36] Speaker C: The IRS and any other jurisdiction you file in has different regulations that you have to follow and that determines what you take from your financial statements, what gets thrown into the mix and what shows up on your tax return.
[00:37:50] Speaker D: Right.
[00:37:50] Speaker C: So generally you've got a profit and loss. And the IRS or the state of New Jersey, whatever jurisdiction you happen to be in, might have some things they have to say about what's deductible and what's not and what's taxable and what's not.
[00:38:05] Speaker D: Right.
[00:38:05] Speaker C: So it's really important for you to understand that what is showing up on your financial statements is not going to be an exact mirror of what shows up on your tax return. That's the beauty of the tax code. It's thousands of pages that Linda and I love to have for our bedtime reading. But the truth of the matter is, is that any experienced tax pro that you work with will be able to help you understand those differences and help you think about ways that you can make informed decisions about how those numbers end up. The bottom line, the dollar amount, the check you're cutting to the government.
[00:38:40] Speaker B: And that's a great explanation of the fact that sometimes they're different. But one thing you do have to be careful with, and again, I sit on panels often with bankers and I teach workshops across the country on creating a business plan to grow your business.
You want to make sure that your tax return is not showing this big loss and your financial statements are showing a profit or you didn't intend to show a loss because now you want a loan. And banks don't usually loan money if you're losing money. So you really want to understand the nuances and what you're what you're showing on that report. Sometimes there will be difference because of the states, but Other times, you want to make sure that there's nothing happening with your return, that they are a reflection and that they agree both your books and your tax return. So let's. There's a few components of a tax return, Alana. Right. There's a balance sheet on it that we talked about in an earlier segment, and there's a profit and loss statement on it. So what about the balance sheet that one should that look exactly like your QuickBooks file or whatever you use to track your books?
[00:39:57] Speaker C: Yeah. That's an interesting place to start because often I will find a new business owner comes through my doors. I asked them for last year's financials and I asked them for last year's tax return, and they're often pretty out of whack. And sometimes that means that your CPA or your accountant is making adjusting entries in order to get the tax return accurate that maybe aren't flowing through to your books. So that is a quick question for your CPA or whoever's preparing your taxes. Hey, are there any adjusting entries I need to book?
So that being said, the balance sheet does go in most cases to the irs.
So you want to make sure that those numbers are accurate.
[00:40:38] Speaker D: Right.
[00:40:38] Speaker C: You want to make sure that your assets and your liabilities are agreeing to whatever you're submitting to the government. And I think a lot of small.
[00:40:48] Speaker D: Business owners sort of get tripped up.
[00:40:50] Speaker C: In loaning themselves money or loaning the company money. That is an area of the balance sheet and specifically when it comes to income tax that you really do need to pay attention to. If you loan your company money or you borrow money from the company, the government wants to know about it. They want to know that you, as an owner, as a shareholder, depending on what forms you file, have that financial relationship.
[00:41:16] Speaker D: Right.
[00:41:16] Speaker C: So you need to make sure that you understand what is required to be reported in terms of financial transactions that you're having as an owner. And on the same note, I will say as a business owner, sometimes you're putting money into the company, Right. Sometimes you're funding operations out of your own pocket. It's very common. And so what you want to make sure that you're doing with your accountant is that you're either segregating what's business and what's personal, or you're accounting for those transactions in a manner that's consistent with what is required to be reported.
[00:41:49] Speaker B: Exactly. And I want to reiterate that point about loans, because one thing that sometimes happens is people borrow money from the bank, from a credit card from themselves. They put the money in their business and spend it. Let's say you did that in December of 2024.
And that tends to create a loss because it's not. You paid bills with it, but you didn't pay bills out of your sales, you paid it out of this loan. So there's no income. That's creating kind of a loss. And then next year 2025, you go to pay it back. That creates a profit because how do you pay it back? Oh, you made some sales and you brought those sales in and then you gave the money back to say to the bank. That creates tax on something that you no longer have the cash to pay with. So I often say, just be careful with these loans. Pay attention to your books. Are there loans there? If you're going to pay them back, make sure you're talking to your accountant, your bookkeeper about what that will do to your cash flow. Because this is about both taxes and, and the cash flow you need for those. And it's a timing difference really there. So in addition to that, there's different forms, right. Our business owners, some of them are sole proprietors or single member LLC or S Corps or partnerships or C Corps. Why don't we just say what are the different tax forms? That they should know, they should understand what they file. Right. How they file their taxes.
[00:43:22] Speaker C: Yeah. And coming back to the third parties, this happens a lot. When a business owner comes to me and says, hey, my bank wants my tax return. And if you're a sole proprietor, your company is not filing a separate tax return, your business income is flowing through your personal 1040. Right. Versus other kinds of businesses. If you have a partnership with more than one partners. If you have a corporation, an S corporation, they are filing a standalone tax return.
[00:43:53] Speaker D: Right.
[00:43:54] Speaker C: So if again, if you're a sole prop, it's flowing through on your 1040, there's a schedule on your, on your personal tax return called schedule C. That's where all your business operations show up. And that is true. Even if you have an llc, if you open an LLC but you're the only owner, you are still considered a pass through. And it's showing up on your 1040.
[00:44:17] Speaker D: Right.
[00:44:18] Speaker C: And versus if you have an LLC with more than one partner, or you formed a corporation, or you have an S corporation, then there truly is a standalone tax return that is for your business only. So that's a very important distinction because I think a lot of taxpayers expect a separate business tax return. But often it's actually just part of their 1040.
[00:44:40] Speaker B: So now we're speaking in January, but this could be any year. You're filing your taxes for last year. So this is a great time. As you get your numbers together, make sure your books are accurate and any questions you have. If you listen to all the segments we did on cash flow and profit and loss, make a list of questions for your accountant so you can get a better understanding of how your business is doing and what impact taxes have on them. It can be a roadmap that how can I minimize taxes? But balancing wanting to have a profit, too, because you're trying to grow, right. You want to be able to have enough money there to fund your growth. So you should know what kind of tax return you file. I often ask that question. And the business owners don't know what they file. You want to know, ask your accountant when you go in to see them. Now, what type of tax return? What's the form number I file? And can you walk me through it so I understand it, Alana, I know that you don't just deliver a tax return and never have a conversation.
You, I think, have an important conversation to help them understand it after the fact, don't you?
[00:45:56] Speaker C: Absolutely. Yeah. I mean, you are, you are signing that tax return and you are attesting that what is on it is complete, true, accurate.
So it's, it's not something that you want to just slap your signature on.
[00:46:10] Speaker D: Right.
[00:46:10] Speaker C: I mean, you really do need to understand those numbers. Hey, this is what we're telling the government is taxable. Hey, this is what we're telling the government is deductible. Right. Those, those numbers are real. They matter.
Unfortunately, or fortunately, depending on your perspective, the IRS has a bigger budget and they are auditing with more frequency. And so you really do want to talk to your accountant. Yeah. What are those numbers? And also what is my responsibility, right, as a taxpayer? What, what do I need to do to make sure that I can substantiate these expenses that I'm audit proof? You know, these are the conversations that you need to, that you need to have. And you need to understand, because we see it, we do see it, that the records that you're keeping have got to fall under what, what the government tells you they need to do.
[00:47:02] Speaker D: Right.
[00:47:02] Speaker C: Otherwise you're going to have a different conversation.
[00:47:06] Speaker B: Right. And so thank you for being with us. You can find our CPA firm lahcpas.com Alana, what's your LinkedIn profile?
[00:47:18] Speaker C: Yes, you can find me under Alana McNichol, CPA. You can also shoot me an email a mcnicholas.com throw balancing acts in the subject line so I'm sure to see it. And I'd love to have a conversation with you.
[00:47:33] Speaker B: Thank you. And I hope what you understand from this is understanding your tax return. It's still the past. It's what happened last year. We cannot change what happened last year. What we want to do is be able to impact the future. Where are you going? And how do we make positive changes so you can grow more profitably and resiliently? I'm glad you stayed with us. Come back next week for another episode of Balancing Acts to Grow, Profit and Scale.
[00:48:05] Speaker D: This has been a NOW Media Networks feature presentation.
[00:48:08] Speaker B: All rights reserved.
