October 28, 2020
As we were working with a new construction company, it showed that they had a pretty good year last year. However, they were having a little problem with cash flow during the last quarter. Then, with the bookkeeper they have in place at that time, they thought things would go well. But it did not. There were still lots of issues that are currently going on with the business.
Aside from just cash flow, they were looking to go and get their taxes done. Just before the deadline last September 15, there were still a number of issues. The numbers in their balance sheet are now the main problem.
Why Does The Balance Sheet Matter?
Balance sheet is important in many ways. But I am just going to point out one main reason. At SimpleBackOffice, we always let our clients know their numbers. They need to know why and how every number on the balance sheet is important.
It helps with improving profits and reducing taxes. You will be amazed at how many missed opportunities there are that show up largely because the business owners don’t know what they’re actually looking at.
Going back to the construction company, their accountant or bookkeeper has been sending them financials hopefully once a month. Right? Wrong. With how busy the business owner is, they did not have the time to look at it.
And even when they do look at it, they don’t really know what they’re looking at. A lot of times they’re just looking at what’s on the profit loss and did them make a profit and similar things. I got to tell you, a lot of times that is so misrepresented. Most of the time it is related to their salary being understated. They’re taking all the money out and distributions and things like that.
So, what we found in the company is that their fixed assets are not stated properly. Things like the forklift, the trailer, the five different vehicles, they’ve got their trucks that are going out to job sites and things like that.
Well, here’s what was fascinating, they went ahead and provided their CPA a copy of the balance sheet. Surprise, surprise, it only had like three vehicles on it. They were not previously capturing depreciation to start with.
And here’s why this matters. They had about $35,000 of those fixed assets. Three vehicles are what’s on the balance sheet. Though it is not all that much if they were capturing depreciation properly. However, if they listed all of their seven trucks in there, their federal tax bracket could have decreased to 32% instead of what they are currently paying, which is 35%
Let’s look at if they were at a 32% tax bracket federally, and if they had applied the depreciation properly and captured all of their fixed assets, and did this correctly, it could have dropped them from 32% to actually 24%
And when you start looking at the money on that kind of basis, it’s significant in a big way. A lot of times, if your bookkeeper is somewhat bordering the edge of maybe incompetent, or they really don’t understand a particular area, they generally won’t tell you or beyond that.
Worse is they may not even ask you for a particular area within that. Then, when it comes to just filing your taxes, this is the kind of stuff that ends up (more often than not) costing you more.
In conclusion, if they listed all seven vehicles or their assets, they could have had more or less $14,000 in depreciation. Now, they only have $7,000. That is only after the three vehicles, which costs $35,000. We divide that by 60 months then multiply by 12.
Just imagine what the $14,000 could do to your tax bracket. In the end, the balance sheet really does matter. You need to be careful and look at what’s being listed on there.
Also, I just want to go ahead and say, if you’ve been working with somebody for a long time and you’ve not had an objective third party view, I am available for an audit and objective view so message me here.
Most of our audits are high six and seven-figure companies. Their comprehensive screenshots, Aero, heavily annotated, and so forth. It ranges from 14 to 21 pages up to 50 pages. Everything is fee-based. Everything is highly objective. It’s an actual deliverable that we provide to them. And they’re able to go ahead and carry out the implementation themselves.
If you are not able to, you may email me here (email) so I could work on it. But in the end, I think it’s really important that you’ve got to do your numbers to really know your business. And right now, we’re moving into the second month of the 4th quarter here.
I hope this has been able to give you guys a little bit of added insights of why your balance sheet matters
Last but definitely not least, understanding, the value of fixed assets and how that can actually impact your taxes is important.
Chief Experience Officer
“Know Your Numbers, Know Your Business”