03 Mar Top 5 Tips for Tax Time
Episode 31: Welcome to the She Builds Show, I’m your host, Stefanie Olson. I hope you’re having the most fabulous day and truly take time today to find something to be grateful for, gratitude can change everything. Today, I want to talk about your taxes and the financial picture of a small business. I’m breaking down my top five tips for the financial part of your business and how to get ready for tax time without a huge giant headache.
Ready? Let’s go…
• This is one of the first things I would tell them. Get a separate bank account. If you are running a legit business, you cannot co-mingle your personal funds with your business, this should be right up there with getting your business license. Step one, you need to have a separate bank account for your business activity, once you have this, you need to respect that account and do not pay for personal items out of this account. Do not buy groceries from your business account. Same goes for your personal account, do not pay for items out of your personal count that are for your business. And here’s the best reason why I could tell you this, if your business gets audited and you have co-mingled your funds into your personal account, you have to give the Auditor access to your personal account. (01:40)
• Every month you need to review your profit and loss, and I’m going to go into that in a little bit. But knowing what your business is doing, even if it gives you anxiety and you don’t feel like you’re a numbers person, you cannot ignore the numbers, you have to know on a monthly basis. They tell you everything, okay? So, I need you to know the difference between gross profit and net profit. When I was a kid and my dad was teaching me this, it was just this foreign concepts and I could never grasp it, so I’m going to try to break it down as super simple as possible for you, so… Gross profit, it is gross and disgusting, it is a number that tells you a lie, it’s the number that you look at before any expenses, gross… We don’t like it. So for example, in my life, gross profit is what I sell a house for, it’s a lot, and it’s gross because I have a crap ton of expenses that I had to pay for to build that house, it’s not my real money… It’s gross. Okay, got it? Net profit is the number we want… Net income, net profit, same thing, is how much money we really made. Net profit is your income, your gross income minus all of your expenses. (04:15)
• So you need to know your net income on a monthly basis, you need to track this number constantly, a lot of people just get confused and they go, Oh, I made 6000 bucks this month, but that was their gross profit and they have no idea what their net is. So, your net income needs to be tracked monthly. Okay, this is number four. What is a profit and loss statement? Super simple, it’s a sheet of paper that shows you your net income, it’s the details of your gross income minus your expenses and operating costs, that comes to the bottom line and shows you your net income. It shows if the business is making money or not. Don’t be scared of a profit and loss, it’s simple. Let’s say you have a cake company, your profit and loss statement would look something like this, your gross income would be how much you sold the cakes for to the customer, next it would show your expenses, how much you spent on the ingredients to bake the cake and then your final number would be your net income. How much did you make on the cake? These numbers are so important because they help you make the right decisions; should I charge more for my cakes? Should I find cheaper ingredients? Is my kitchen rent too high and killing my net income? The numbers help drive your decisions, and if you don’t know the numbers, you can’t fix the problems. (05:59)
• But as a business owner, it’s helpful, see the big picture and understand that where these numbers end up and why it’s important to track them, it’s also helpful when it comes time to preparing your tax return that you have already tracked all of these numbers on a monthly basis, because if you are noticing that your net income is really high and it’s much higher than last years, you won’t be also angry and upset when your accountant tells you how much tax you will, because you’ve been in the numbers, you know you saw the signs, so dig in, look at the numbers, blog off two hours every month to organize and get familiar with financials. (09:33)
WAYS TO CONNECT WITH STEFANIE…