April refunds bring May expenditures?

California Poppies

Now that you’ve hopefully completed the annual rite of tax return preparation, you have time to dedicate to other more fruitful pursuits.  Yes, we all dread the process of our annual interaction with the IRS.  Some come out on top receiving a refund and others are left to figure out not only why they owe more taxes, and how can they keep from paying more in the future.  I leave this up to the highly competent and professional CPA’s.

But what about how your tax planning affects your business planning?  How many times have you made a decision that compromised your strategic business plan in order to save a few tax dollars?  What is “wagging the dog” of your business, the financial plan or the marketing plan?  Yes, there are smart ways to finance your business, occupy a building, acquire capital equipment and purchase inventory.  And all of the financial choices you make affect your tax burden, both in the business and personally.  The important point is that you aware that you have choices and some choices are more expensive than others for your business.

Let’s look at the four financial decisions mentioned above and how you can consider the choices.

Financing your business – For most small businesses, the first choice you usually consider is whether or not to take on a partner.  Whether it’s a family member, friend or business acquaintance, this decision should not be taken lightly.  The biggest advantage is that an equity partner is probably not going to require a monthly interest payment like a bank or other debt holder.  The flipside of this decision is that someone else is part of the decision making process regarding the overall strategy of the business.  The bigger the percentage of the business that you give up, the less control you have as a business owner.  Debt is also another method of funding your cash needs.  The big advantage is that you maintain control of your business.  The big disadvantage is that you have to make a periodic payment based on an interest rate determined by the debt holder (and those payments have to be made or else!).

Occupying a building – This decision is typically a “buy or lease” decision.  Just as with your personal living arrangements, owning or renting has their distinct advantages and disadvantages.  My personal bias has always been toward being an owner versus a renter. Owning your business property can be a great long-term investment as well as being a source of control of your business destiny.  You don’t have to get a landlord’s approval for improvements and by acquiring the building as an asset; it can provide cash flow in retirement after divesting yourself from the business.  That said, if your business is growing and your needs are changing, locking yourself into a building may not be the best scenario for you.  Having the flexibility to move to another facility may mean that renting is the best choice.

Acquiring capital equipment – The purchase of capital equipment is a long-term decision in order to further the business for many years.   And purchasing may not be the best decision either.  While I’ll jump on my “purchase” soapbox most of the time, cash flow may not be adequate and leasing may be a better alternative.  A “buy or lease” exercise is needed to properly identify the correct choice for you.  This exercise will include performing research into the various methods of purchasing or leasing the specific equipment you want to acquire.  There are many characteristics of this type of transaction that may affect your tax burden and your cash flow.  I cannot emphasize enough the need for a thorough analysis before making this critical, long-term decision.  Also, make sure you’re aware of any special considerations you need to give to the method of depreciation or tax credits.

Purchasing inventory – In many businesses, particularly retail and distribution, inventory can be a real killer.  Buy too much and you have to liquidate excess inventory, thus squeezing profit margins.  Buy too little and you could lose customers.  One key factor in purchasing inventory is to get the longest terms possible from your vendors.  If you can get 90, 120 or 180-day terms from your vendors and can get paid in 30 days from your customers, you are that far ahead of the game.  Just make sure that your cash flow planning is done so that you really do have the cash when the vendor bills come due.  Also, remember that your inventory valuation methods will have an affect on your tax burden.  Make sure that you consult your CPA on the correct method for your business.

If you have a question or would like to see a specific subject covered in this blog, please let me know.