Accountant is someone who solves a problem you didn’t know you had in a way you don’t understand at a price you can’t afford.
Adam and Eve didn’t have to pay taxes while living in the Garden of Eden. They did, if you believe, have divine supervision looking out for their needs. We, unfortunately, have to settle for governments which are less than perfect, and which have fallen in love with the concept of taking money from the people who comprise the nation. Ergo, records, record keeping, record keepers, and taxes going back to before the Pyramids. That’s a long time. It seems a ‘good’ idea is worth keeping around.
I won’t argue the inefficiencies of government, or the necessity for taxation, only that in principle the collection of money to finance the defense and infrastructure of communities (and nations) is arguably a good thing. We all benefit, to some extent (even if you don’t think you do), by the expenditures by governments on education, health care, infrastructure, and defense. Personally I don’t necessarily agree with how our dollars are being spent or the lack of accountability of the people writing those cheques, but that’s another story. As part of the process, the law has made us all collection agents for the government as well as taxpayers, and an integral part of the system is the self-assessment of tax reporting. We are responsible, as individuals, as proprietors, as shareholders, as administrators and trustees, to report periodically to one or several levels of government, assessing ourselves the legal amount of tax to be remitted based on the tax laws. Those laws are complicated, as laws generally are, but tax laws are especially complex having been written in a manner that someone intending to misinterpret, cannot! That doesn’t make things any clearer for anyone. That’s why there is an appeals process and Tax Court – because it is not a perfect system and neither are the laws perfect.
However, the utility of record keeping and reporting goes well beyond simply paying taxes. Before you get to the bottom line, you have to summarize and tabulate data. Fortunately technology has made that process less labour-intensive and time-sensitive. Many software applications do a marvelous job of journalizing, posting, and financial statement preparation, eliminating much of the human effort so that we get useful, real-time data. As an internal control in the operation of virtually any business, nothing is more fundamental than a set of records, properly reconciled and in balance, upon which informed decisions may be made.
I know it sounds dry, and you might say ‘really, who cares?’, but the answer is ‘YOU SHOULD CARE’, because IT’S YOUR BUSINESS and IT’S YOUR MONEY! It is your legal right to use the tax rules to pay the least amount of tax which you are legally allowed to pay. The tax rules are designed to motivate certain behaviours in addition to raising funds to operate the country, for example the government promotes charitable giving and therefore taxpayers are entitled to tax reductions for donating to eligible charities; and the government encourages saving for retirement and therefore implemented tax deductible retirement plans for individuals. If you use these rules, you pay less tax, if you don’t use the rules you generally lose the benefits. It’s a case of ‘use ‘em or lose ‘em’.
That record keeping which seems like such a waste is also the basis for valuing your business when it comes time to admit a partner, or merge with a colleague/competitor, or ultimately sell what you’ve built. From the moment you incorporate and start your business, you should be thinking about selling, and to that end you should be thinking about the financial reporting. You should be thinking about how to balance your desire to pay less tax against how your reporting is going to reflect the value of your business or your access to capital in order to grow. Your financial reporting is a numerical representation of the value of your efforts, a financial snapshot of the tangible, and by extrapolation, the intangible value of your business, and the basis for the price you will ask and the money you will make when you come to sell your business.
It may not be important to you today, but it is an inevitability. One day you will change the form of organization of your business or you will sell it or your beneficiaries will sell it for you. What you do today, will impact on the future success of your business and will impact directly on how much value your business may generate for you upon a sale or liquidation. It’s really a case of being ‘penny-wise, pound-foolish’. Inadequate financial reporting or inappropriate financial reporting will cost you.
Like everything else in life, it only takes a small effort on a consistent basis to get back a disproportionately larger payback. You are painting a picture in numbers that will support your price. That financial picture may be a masterpiece or an indecipherable abstract. It’s your business and your responsibility to ensure that you truly maximize the value of your efforts. It takes time to create a masterpiece – that’s why it’s a good idea to start today. Think about that at the end of a particularly trying day, and you will answer your own question. The only unknown is how much value will be ascribed to your efforts. That’s entirely up to you.
I would love to hear from you and invite your questions and comments. You can reach me by e-mail at email@example.com. With three decades of experience as an accounting professional, consultant to small business and business owner, there may be a few things I can help you with. Call me. Best wishes, Sid.