Want to Scale Your Business? Discover Common Mistakes Tax Accountants Make – and the #1 Reason to Add a CFO to Your Team
Do you want to scale your business … so you can grow your revenue and profit without increasing your costs and hours worked at the same rate? If you’re a woman business owner, take the advice you get from your accountant with a huge grain of salt.
Tax accountants are trusted and valuable advisors to women-owned businesses. But when you’re trying to scale a business, any advice they offer can be skewed and tainted by the unique filter through which they analyze company financials. When deciding whether to heed the advice received from an accountant, women business owners must understand how tax accountants are trained to view the world, as well as what financial data they need to inform their decisions.
How Accountants Are Trained to View the World
The primary focus of an accountant is to find ways to minimize taxes. It’s an important role for sure. After all, you don’t want to pay any more tax than absolutely necessary, right? Minimizing taxes means that you’ll have more money to spend on other things, such as payroll, marketing, product development, equipment, and even owner dividends.
Yes and no. On the surface, it seems logical that if you spend less on taxes, you’ll have more money to invest elsewhere in your business. However, ultimately the way that you spend less on taxes is to find ways to minimize your profits. For women business owners who want to scale their businesses, minimizing profits is often a bad objective.
Why Minimizing Profits Can Sabotage Scaling
Scaling a business typically requires a significant financial investment. The way many women CEOs fund business growth is by reinvesting profits. But bootstrapping a company’s growth by strictly relying on reinvesting profits typically results in a slower rate of growth.
Imagine if you had a solid strategic plan to 10x your company’s growth within 3 years, with the plan’s projected implementation costs being $500,000. Now imagine how much more slowly you would achieve that goal if your company had produced a profit of only $100,000 to reinvest this year. You’d be able to implement only a fraction of the needed strategies. Then you’d have to wait for those strategies to produce a bigger profit, so you could reinvest and pay for additional implementation in the following year. Rather than achieving 10X growth in 2 years, it might take you 10.
Now consider the fact that accountants rely on and recommend financial strategies that minimize profits as a way to minimize taxes. Their advice is on point for the job they’re hired to do. But it conflicts with the goal of scaling a business. By minimizing profits as much as possible, they inadvertently limit the company’s growth potential by significantly restricting the amount of money available to invest in growth. Now, rather than hitting 10x growth within 10 years, it might take you 15 because you have smaller profits to reinvest each year.
Typically, the better way to fund business growth and scaling is to seek capital from lenders. (Discover the top 12 ways to fund scaling of women-owned businesses here.) But when your business shows minimal profits, it signifies to lenders that your business is not a good risk. Lenders know that you’ll be repaying their loan with your profits. Low or non-existent profits mean that you have a higher chance of defaulting on a loan.
Organizing Your Financials to Support Scaling
If you’re trying to scale your woman-owned business, you might also want to ignore a second common piece of advice frequently offered by accountants: How to organize and manage your company’s financials.
To scale your business – and access the capital needed to finance your scaling plans – you need to have a solid handle on:
- Exactly where your company stands financially at all times
- Where it’s headed and what trends are present
- How every decision you’re considering regarding scaling plans will impact your numbers
Many accountants recommend cash accounting systems because they are easier to manage. But accrual accounting is vital if you want to match revenue to expenses. Otherwise, you never really know where you stand.
Cash system looks only at money in, money out for any given time period. There is no way to tie revenue to actual expenses. Accrual accounting allows you to accurately calculate profits by identifying your Cost of Goods Sold (CGS), as well as overhead. (Subtract these two critical categories of expenses from your revenue, and you’ll know to the penny what your profit on any job or contract is.)
But even women-owned businesses that use accrual accounting may not have their financial reports organized properly. Your accountant should be preparing your financial statements in a way that makes it easy to understand what is happening in your business, as well as how decisions could potentially impact your company’s profitability. Discover the 10 numbers every woman business owner should know here. If they aren’t, you may want to seek the opinion of another financial advisor.
“Good” Accounting Advice Skews Your Perception
Implementing the advice accountants offer may minimize taxes. But it can also skew your interpretation of what’s happening in your business.
For example, one popular accounting strategy is to find ways to delay paying taxes until the following fiscal year. The hope is that the next fiscal year might have higher expenses to offset revenue and minimize the taxes you need to pay. However, by kicking the expense of tax payment to the following fiscal year, the current year looks more profitable than it is, while the following fiscal year looks less profitable than it really is.
Because they are trained to look for ways to minimize taxes and, therefore, profits, accountants may not think strategically about expenses. They may encourage you to invest in items that might be nice to have, but that are not necessary to achieve your strategic financial plan. They also may not recognize or think about ways to lower expenses, simply because lowering expenses would then increase profits and taxes.
For example, Evolve CFO Services recently consulted with a woman business owner who traveled regularly to a particular city. Her travel expenses were significant, but she wasn’t overly concerned. After all, her travel expenses were tax-deductible and helped keep profits low, and therefore, minimize taxes.
As Chief Financial Officers (CFOs), we believe that the goal of a business should be to maximize its profits. The resulting increase in taxes is simply a sign that a company is more profitable. We advised this client to purchase real estate in the city she visited, so that she could stay in a property she owned vs. expensive hotels. Yes, she incurs maintenance expenses on her property. But overall, she has saved far more in travel expenses, which has boosted her profits nicely.
3 Reasons to Embrace Taxes – Despite What Your Accountant Says
Accountants are trained to find ways to minimize taxes. CFOs are trained to interpret and manage financials strategically. To a CFO, paying taxes is a good sign for 3 reasons:
- Taxes are calculated on profits. If you’re paying taxes, your business is profitable. That is the goal of a business!
- Profitable businesses are attractive to lenders, who recognize that businesses must produce profits to service their debt.
- If your business is not taxable, it will not get tax credits, such as Work Opportunity Tax Credit, the Small Employer Health Insurance Premiums Credit, the Research & Development Credit, and many more.
Need Strategic Advice to Scale Your Woman-Owned Business?
Accountants play a critical role in women-owned businesses. But if you’re attempting to scale your business, your accountant’s advice needs to be tempered with guidance from a financial professional who is trained to think strategically. You cannot achieve your company’s growth potential if you’re focused on minimizing taxes and profits. To create a strategic financial plan and organize your financials to provide the data and insight you need to effectively execute that plan, seek the additional support of a CFO.
Want help creating a Financial Breakthrough Roadmap and strategic financial plan? Book a complimentary, no-obligation Financial Strategies & Solutions Session with one of our highly trained virtual CFOs to explore how we can help.