Regulators like the IRS and the Department of Revenue make sure you don’t ignore the precise figures they require for very long. It’s not a coincidence that people who might otherwise be living in denial about their true profit will find this to be highly advantageous.
If you don’t keep track of your business finances, you won’t know whether you actually have a successful business and whether it’s worthwhile to work on it for another year. When you file your taxes, that’s probably the first time you have any idea if you made any money. I do sometimes have to tell clients they lost money and they don’t consider it good news. The majority of business owners have found that, in exchange for the chance to follow their hobbies, these accounting standards force owners to deal with a number of time-consuming, administrative bookkeeping responsibilities. These so-called “time vampires” can seriously harm a business owner’s productivity.
What happens then to this lengthy and perplexing list of crucial accounting and bookkeeping related chores for most small business owners? Initially, these tasks are generally ignored. It’s a necessary but time-consuming and tiresome task you must complete in order to appease the authorities. These duties turned into ticking timebombs instead of potential profit drivers. The financial metrics could be giving you, the owner, financial data about your future. You understand that the backlog of administrative work is not only consuming valuable mental resources but will soon directly clash with your ability to manage your firm. Thus, procrastination is no longer in your favor when you’re on the phone with a tax collector who wants money that you don’t have. If you continue to refuse to pay them, they will eventually levy your bank account and secure your door with a chain and make it crime to continue to do business.
It is obvious that engaging in these activities contributes to stress. However, the IRS and the Department of Revenue have a steep learning curve, so you’ll either need to understand it or pay someone who does. The government won’t call to see how your business is doing or to see if you need any help, but because they are a collection agency for the state and federal governments, they will always call if you neglect to file a return or don’t pay a tax bill on time. They’re either calling to demand the money they believe you owe them, or to force you to provide evidence that you don’t. They typically tell you at that point that your company’s financial models must be adjusted to take reality into account.
You obviously do not want to be in this position, but many individuals are. There is a certain expression of skepticism that some new business owners have when the tax system is explained to them. When they examine their finances from an accountant’s vantage point, they discover that they have very little extra cash at their disposal. They learn what they previously knew—that they must either take out more profit or find additional funding—because, at least on paper, planning for tax consequences provides even less to survive. The first step in trying to optimize profit is having all the necessary information. Accounting can make all the difference.