Have a Heart, But Use Your Head

Start planning your end-of-year financial strategy now — yes, NOW— for 2023

I have a lovely client, who gets overcome with emotion toward the end of each year. She waits until January to bill her clients in an effort to minimize her taxes, but as December draws to a close, when there should be festivals of light and sugarplums dancing in her head, she has a little meltdown. She wants to show as much profit as possible, it’s a matter of pride and satisfaction. The higher her profit, the better she feels about her business and herself. Her heart swells. But her plan to defer taxable income to the following year is at odds with that feeling.

She’s not the only one, in fact, it’s fairly common. At the beginning of each year, when we set out to do a budget, our goal is to maximize profitability. How much revenue can we derive? How much money do we need to spend to attract that revenue? What’s left over at the end is going to be our profit, and we want to maximize that.  Then at the end of the year, they end up showing very little from a profitability standpoint. And they’re sad.

Part of my job is to help them understand that they really have made money, even though, from a tax perspective, they may not be showing it. To make the best financial decisions for their businesses and themselves, they have to learn to be OK with both head AND heart.

Repeat after me: It’s OK to show you were less profitable to take advantage of tax benefits. Most folk are on cash-basis accounting, where you record your income or expenses the moment money exchanges hands. (Cash and accrual are two different accounting methods. What’s the difference? I was hoping you’d ask, I wrote about it here.) Cash accounting leads to the Q4 conundrum. When they get to the end of the year, they could prepay for software subscriptions and not bill December clients until January. Great, right? There’s a “but” — a big but, and it goes way beyond any good feelings associated with higher profit.

What if you need cash? What if you delay billing but your rent is due January 5th and you don’t have the cash to pay for it? That’s where things get a little tricky. You’re basically trading off the ability to have cash in the short term for a tax advantage. If you need cash, you’re playing a very dangerous game if you delay your billing. What if clients don’t pay you within those five days? (News flash: They likely won’t).  You may have to forego some tax benefits in order to pay your bills. Wah wah.

So what can you do to avoid that situation going forward? As a CFO, I can help you with cash management strategies, we’ll work together to build up cash reserves thoughtfully while also minimizing your tax liability, BEFORE December 31st.  Let’s chat about how to develop the right balance, both your brain and your heart will thank you.


More articles:

Return to blog