During one of my roles at a large multinational corporation, my business partners asked me to look into the tax benefits of donating material. You see, the team had already bought the material (so it was already expensed, aka “written-off” for tax purposes) but they did not need to use it anymore. They wanted to know if there was any reason for them to donate the material as opposed to just throwing it away. Throwing the material away would be easier so they were looking for an incentive to donate the material.
Since I am a business financial planner, I create and analyze financial budgets and forecasts compared to actual results, I reached out to a tax accountant for an answer. Similarly, in a corporate world, a tax accountant would not answer questions from business partners on planning out the financial impact of future business decisions. Those questions would be deferred to me.
When I reached out to a tax accountant I explained the situation and he answered that since the material had already been written-off (or expensed) there was no further tax benefit that could be gained. When something is expensed then the full value of the item is reduced from taxable income, simplified meaning: you don’t pay taxes on it. Then he said something which embodies so much of what we KNOW in corporate finance but that is not well-known to the average person outside of finance:
Please tell your business partners not to make any business decisions based on how they think it will impact taxes.
Why did he say that? The short of it is that taxes are complicated and a good tax accountant can do your taxes well whether you are making billions of dollars in profit or negative profit. Companies who are making BILLIONS of dollars in profit are paying a relatively small amount in taxes and are using the same tax code that you are as a small business owner. That means that the tax savings are in the tax code and are not based on the business decisions you make. You should make business decisions based on what is best for growing and improving your business not based on how you think it might impact taxes.
And it is something your tax accountant should be saying to you. Similarly to what highly paid tax accountants for large corporations say to their business partners.
Most people do not know much about the role of finance and accounting in business and I understand why. Corporate finance especially is a highly specialized skill usually only very successful companies are aware they need because they can spend millions of dollars getting advice from consulting firms. Smaller businesses with a smaller budget are aware of their immediate need to report taxes and are unaware of their strategic need to plan profitability.
Accountants report business activity that has happened IN THE PAST and have a DIFFERENT role from financial analysts. Financial analysts project what WILL HAPPEN in the future based on current and anticipated business decisions. For example if you have a business that is currently making $50,000 a year and you want to grow your business to $250,000 a year here are the roles of an accountant versus a financial analyst:
An accountant will prepare your financial statements for the past year of $50,000 so you can see how you did.
A financial analyst will take those financial statements and project the next 3 to 5 years of financial statements to see how you can get to $250,000 a year.
A financial analyst will also compare actual results in order to confirm performance expectations, gain strategic insights, and adjust performance expectations to reflect reality.
Many companies will not grow their businesses from $50,000 a year to $250,000 a year because they have not created projections that tell them how to get there. Companies who do have financial projections will also have a much clearer idea of the business decisions they need to make to grow their business.
It is also critical to compare actual results to projections in order to gain insights on your business. Many people I have spoken to have an idea in their head of what they believe has a financial impact in their business, the only way to confirm these hunches is by creating financial projections based on them and then comparing actual results to those estimates. Everyone who goes through this process is surprised and learns something new and important for their business.
I am here to help you! I created financial projections for billions of dollars for things including raw commodities, industrial engineering, loans and leases, and even basic payroll. I have a ton of resources at your fingertips to help you take control of the financial future of your business. I want to teach you how to look at the finances for your business and see opportunities and risks. How to go through the steps to ensure that you can point your business in the direction of your profitability goals.
Reach out to me today to create your basic business budget, create a reliable revenue forecast, manage the profitability margins for your business and even set up internal controls to keep your money safe. You can also come to me to directly produce financial forecasts, easy to read graphs, and strategic insights for your business just like the ones I produced for senior executives at large multinational companies.
Schedule a free consultation call at this link.
Disclaimer
This publication contains the opinions and ideas of its author. It is intended to provide helpful and informative material on the subjects addressed in the publication. It is provided with the understanding that the author and publisher are not engaged in rendering any kind of personal or professional services in this publication. The reader should consult with a competent professional before adopting any of the suggestions in this publication or drawing inferences from it. The author and publisher specifically disclaim all responsibility for any liability, loss, or risk, personal, professional, or otherwise, which is incurred as a consequence, directly or indirectly, of use and application of any of the contents of this publication.