If you just see your tax return as a calculation of what you owe the tax man, you are missing out on a lot of valuable insights. Your tax return is a potential goldmine of insights about your business that can guide your decision-making going forward and open the door for more profits.
A good financial professional, if you use one, will proactively explain what the numbers mean, which ones are significant, and where those specific numbers can be further examined in your weekly, monthly, and quarterly reports. If you are just getting a summary of “money in versus money out,” you are not getting all the value you could be getting out of tax preparation.
Let’s look at some ways that your tax return can help inform changes to your business strategy and help identify new opportunities for growth, and where you can find more details in your own internal reports.
Revenue Trends. “Gross Income” is one of the key numbers on your tax return, and it is also one of the key numbers on your balance sheet, where it is called “Total Revenue.” By comparing that number over the years, as well as the components that comprise it, you can identify areas where your business is growing, stagnant, or declining, and enable you to make adjustments to your business strategy.
You’ll find a breakdown of your revenue sources on your income statement, aka the profit and loss statement, and you can use your accounting software or ask your financial professional to run a variety of reports to provide more insights. By examining quarterly and yearly trends, you can determine things like:
- Which revenue drivers should you focus on, and which may be hindering your profit margins and growth?
- How effective are your sales and marketing programs?
- How various revenue sources are affecting your cash flow, and whether efficiency could be improved.
Expense Analysis. You will find details about your annual expenses on your tax return; your business structure will determine which form it appears on. You will also find these details on your income (P/L) statement, including things like cost of goods sold, rent, utilities, and marketing spends. Once again, look for trends over the previous quarters and years to identify opportunities for improvements going forward.
You should be able to gain insights about:
- Where you may be overspending and cutting into your profit margins.
- How effective your sales and marketing programs have been over time.
- What your return on future investments might be, given your historical expense rates.
Inventory Analysis. Understanding COGS is critical to your business. Your tax return tells you your Cost of Goods Sold (COGS), and once again you can find more details on your income (P/L) statement. There you’ll find COGS broken down into different categories, like raw materials, labor, equipment costs, and software costs.
You’ll want to investigate things like:
- Where are my costs increasing or decreasing over time?
- Are you selling your products at an acceptable profit, as indicated by your Gross Margin (Revenue minus COGS)?
- What is your turnover on inventory, and could it be improved?
Accounts Receivable and Payable. Your tax return may help you identify changes in these important accounts. Looking at them over multiple periods can help you determine if you are managing your cash flow effectively and always keeping enough cash on hand to pay your bills on time.
You can find more detail on your balance sheet, your accounts aging reports, and your cash flow statement. The most important questions to ask are:
- Do you always have enough cash on hand for short-term needs?
- Are you collecting receivables in a way that smooths out cash flow?
- Which invoices are causing collection problems?
- Are my credit terms too loose or too tight?
Fixed Assets. Knowing the details of your fixed assets is important, since their value changes over time, they typically incur maintenance costs, and they determine the total value of your business if you ever think about a sale or need to borrow funds.
You may find details about your fixed assets in a variety of places on your tax return, depending on your business structure and whether you purchased or divested assets over the course of the year. You can also examine your own accounting reports, including your balance sheet, depreciation schedule, fixed asset register, and (once again) your income (P/L) statement. You’ll want to know the answers to questions such as:
- What is the depreciation rate for each asset and what is the plan for future maintenance or replacement?
- What is the current and future value of the fixed assets on the books?
- What are the tax benefits of changes to your fixed assets, and how can those benefits be maximized?
CONCLUSION
Tax season is a great opportunity to look at the state of your business and plan for future profitability and growth. If your financial professional isn’t already doing so, make sure they are explaining the key numbers on your tax return and how they can be parsed and analyzed in your own accounting reports.