Every year the process of filing taxes teaches me the true cost of doing business as a small business owner. My tax return also establishes a baseline for my business and shows me where I can improve.
I began my business 10 years ago. That’s when I started work as an independent contractor for a large metro newspaper — although I thought of myself as a freelancer rather a business owner at the time.
At first, my record-keeping was minimal. I held onto my receipts, some of which were reimbursed by the newspaper, and I sent crude invoices to the paper for my assignments.
None of this helped me to understand what my profit or loss was for the year, and it created a nightmare for me when it came time to file my tax return.
Getting Professional Help
Over time, I learned the importance of tracking expenses and revenue professionally. I use QuickBooks Online to record expenditures and bill my clients. And since my expertise is not in numbers, I hired a bookkeeper who helps me cut checks for employees and independent contractors, as well as reconcile my costs and sales at the end of each month.
With this system in place, I can check my bottom line each month and know immediately whether I’m on the right track for the year. When it comes time for my accountant to prepare my tax return, he can easily review my books online and e-mail me with any questions.
The whole process is a lot less painful than it used to be. And because I have a reliable system in place, I can anticipate next year’s tax burden at the end of each year and get a jump on it.
My accountant provides me payment coupons for each quarter of the year for estimated taxes, based on my previous year’s return. These quarterly payments to the IRS and my state help to ensure that I don’t get caught by surprise at yearend with a tax bill that I can’t handle.
What I Learned from My Return
The best part of having a system in place is that it enables you to take a close look at the health of your business. Think of your accountant as your family doctor and the tax return as an X-ray or MRI that he can use to diagnose areas for improvement.
This year, my accountant was quick to point out the level of debt on my books. Since I’ve been bootstrapping my business from the beginning, I took out a business line of credit early on to make equipment purchases. I’ve paid down the credit line in previous years, but it’s popped back up as an issue because of additional equipment expenditures and operational expenses (such as album purchases for my clients.)
Based on my accountant’s feedback, I’ve set a goal to reduce this debt so that I can keep more cash in the bank and be more profitable.
Another thing I looked at in preparing my taxes is the pace of bookings over the course of the year. Bookings slowed significantly last fall, which I attributed to the poor economy. But I also recently raised my fees, so I’ve kept close track of bookings to see if the price increase might be a factor as well.
Fortunately, we made up for the slow fourth quarter of 2008 with an excellent first quarter of 2009, and it looks like we will be shooting more weddings this summer than last — which should provide the extra cash necessary to pay down our debts.