Early tax planning discussions provide small businesses with better choice. Advisors traditionally deploy their tax planning by starting discussions with business clients towards the end of the financial year. Left to themselves, your clients, will often choose to touch base closer to the end of the year. Sometimes, it is even after the end of the year when they realise how much profit they have made and how much tax they may be up for. Generally that’s far too late to do anything beneficial.
So here are some thoughts of doing things against the grain and help businesses to improve their positions. Work ahead as time for tax planning is always NOW.
Traditional Tax Planning Strategies
For many businesses, TAX is probably one of the most dreaded words in the English language. However, it is indeed a fact of life when running a business. In considering this, we have noticed:
Many businesses are worried about how much tax they will need to pay.
We have previously provided some tips on how you can use Calxa to manage business tax planning quickly and easily. The executive summary is:
- Create a budget based on the current year actuals.
- Select the remaining months of the year and base the budget on the previous year actuals.
- Use Calxa’s P&L with Projected Total report to show the projected income, expenses and profit.
- Adjust the budget for the remaining months.
- Repeat until satisfied.
This process works but, as we all know, the later in the year you leave this planning, the fewer choices you have. It means that your client has less time to implement new plans. It is time to do things better!
Modernising Your Tax Planning Approach
Leaving the tax planning to the latter part of the financial year made sense in a world of manual, disconnected systems. However, one of the beneficial side-effects of GST implementation in Australia was that it required all businesses to have up to date financials at the end of every month or quarter.
Note: We are still waiting for it to fix the cash economy…
The Modern Tax Planning Way
Instead of a single touch point around tax time, modern tax planning involves partnering with the client all year round. And ultimately, becoming a confidant in all things to do with their business journey. This can include discussions about growth, downturns, capital purchases, team expansion planning right down to technology systems deployed to bring together their business data.
Cloud-Based Accounting Systems
The advent of cloud-based accounting systems and the automation of data entry means that most of your clients are now up to date much more frequently. Possibly, daily for many businesses.
This means that by the end of the financial year we can have a pretty clear picture of the business performance for the year. Even if not everything is reconciled and ticked off, if there are still some adjustments to be made, for the practical purposes of management reporting and planning for the future, the information is accurate enough.
Start Tax Planning by Forecasting the Profit Position
We can then spend time in the first month or two of the new financial year working with the client on a budget for that year. Start by projecting last year’s actuals forward. Using the Budget Factory makes this simple.
The purists may argue for zero-based budgets but what is important is to produce something quickly, efficiently and at a reasonable cost.
This budget will provide the starting point for a conversation with the client on what they will do differently in the coming year. There are few pertinent questions that will need to be asked:
- Will they be expanding?
- Are there new projects in the pipeline?
- How optimistic are they?
- What additional expenses will there be?
Put this all together and you have the projected profit for the year.
After that, you can start early on the tax advice. Also, while there is plenty of time to act on it, your client can implement the plans you have made.
Adjusting Your Tax Advice
To make this work, you will need to monitor the performance to the budget during the year and check if it is straying from the initial plan. Use Calxa’s report bundles to automate their monthly report to your inbox. For example, you can include some actual vs budget reports, a cash flow forecast and some pertinent KPIs to get a quick snapshot of where your client is going. If you want to step up your management reports, you can get some ideas from our Best Practice Management Reporting Guide.
This gives you a great opportunity to make modifications to the tax advice if and when necessary.
Use Tax Planning To Get To Know Your Client
Tax planning is the perfect starting point for accountants to engage more closely and regularly with clients. In other words, it is an opportunity to get to know your client’s business better and dip your toes in to advisory services.
If you are familiar and comfortable with tax planning, use it as a strategy to work more closely with your clients. Help them with monitoring progress throughout the year and they will see you as a valuable sounding board for all sorts of business ideas, not just those that are tax-related.
So, start regular discussions with your clients on tax, they will soon expand the conversation to include other areas of concern like:
- Profitability
- Income and expense challenges
- Growth strategies
Final Words on Tax Planning Strategies
This service may not suit all your clients. However, for those who are growing, you’ll be providing them with valuable information and advice. The conversation may start with tax planning, but we all know that’s not the main driver of business decisions.
If you can help them build a profitable business, the tax part will be easy.