It's that time of year - tax time for business.  March 15, or, as I refer to it: the day when all that expensive record keeping culminates in an expensive session with your accountant.

Record Keeping

We are pretty careful to keep good records so that we don't have any problem breaking an invoice down, six months later, between $235K in billable work and $95K in reimbursed expenses. Likewise, meals and entertainment are separate from other travel expenses.

We don't spend a fortune on software, and you don't need something super fancy.  A thousand years ago when SAP roamed the earth, destroying everything in its path, I worked for a 250 person consultancy.  We managed a $30M/year organization on Quickbooks plus some custom reporting in Access.  Amazing.

I know a guy who owns a 200 person manufacturing company and he keeps his books 100% on paper.  The only time his information goes digital is when his accountant files his taxes.

I think the trick is to capture everything that happens, as soon as it happens, and then file the source materials away with sufficient notes. 

Planning Ahead

Once there are more than one or two people in the company you need operationally managed finances.  Are you going into a new line of business, such as moving from custom development to selling semi-custom software?  When you were doing your operational planning, did you consider the revenue and tax implications?

Are you taking on a remote employee?  Do you then luck into filing taxes in a different locale?  Are there different record keeping requirements?

The Cost of Lazy

You simply have to keep track of the details as they occur or you will absolutely pay a penalty at tax time.  The penalty may be confusion, or panic, or worse, but there will be a penalty.  Like forgetting your anniversary - you'll certainly pay for it.

It's a cliche imaged image - a guy shows up at the accountant with a shoebox full of receipts.  What is not funny is what happens when you play the game that way.  If you just figure that you'll figure it out this is what is going to happen:

• You will pay your accountant more.  A whole lot more.
• You will pay the wrong taxable amount.  If you have a good accountant, you'll pay more taxes.  Otherwise you'll just owe taxes ... until the IRS figures it out.  Then you get penalties.

Let's say you do $2.5M in revenue and pay $400K in various taxes.  If you accountant has to make a 10% mistake on the upside to protect you that is $40K in extra taxes.  If your operating margin is 25% that means you  need an extra $200K in sales to cover the cost of sloppy book keeping.  Oh, wait, you have to pay taxe on that, so call it $250K.

$250K in extra sales, not to mention the $40K that doesn't go into the bonus pool, is enough to make me plan ahead, keep good records, and have a good accountant.