It’s that time of year again when everyone visits their accountant or bookkeeper and has THAT conversation – you know the one – how much tax they have to pay. The question that goes through almost every small business owner’s mind at that point in time is “How am I going to pay this?” or “Really I made that much? Surely it can not be right! I don’t have that money in my account…” and then the other little voice starts – “are you sure this is all worth it?
Should you not give it up and go work for someone else – you know it will be easier…”
There are some small changes the business owner can make now that will make it easier to pay these debts and to deal with the stresses of paying tax.
1. Keep track of those drawings.
Many business owners forget or lose track of how much money they withdraw from the business by paying for personal expenses with the business credit card or cheque account. One suggestion to keep track of these expenses is to have a “Drawings” expense account on your Profit and loss statement. The accountants will all be jumping up and down by now and say this is ridiculous and wrong – they are correct – this is not 100% the correct accounting treatment but at the end of the day this can be corrected with a simple journal entry at year end to the correct account on the balance sheet. In the mean time the business owner can see at glance what profit is left in the business after they have made their withdrawals.
2. Pay yourself a salary.
Stop paying for personal expenses with the business account, rather transfer a fixed “salary” amount to their personal account. At the same time transfer a “tax” amount to a savings account and DO NOT touch it for anything else but tax instalments. Not only will the money earn interest for the business owner but the stress of not having the tax money ready will be reduced.
Some business owners feel they have more control over their spending habits if they can see how much they have in their account. Transferring money into their personal account and using this for personal spending also gives them a sense of freedom and eventually control over those unexpected impulse spending.
3. Change the attitude towards paying tax
Most of us complain about paying tax and don’t want to pay it at all. However paying tax also means that you have had a good year, you have made profit, not a loss.
4. Tax planning – Once the business owner is more in control of their finances they should speak to their accountant about other strategies on how to maximise their profits, strategies to reduce the tax, implications of investments and capital gains when those investments are sold.