As I start the planning process for the next year, I try to allocate sufficient time to review the current year to date results. With several of the small businesses I am an on demand CFO at, several common issues keep coming up. Business owners are being advised by their accountants, tax preparers and collogues, to increase spending at year end so as to lower taxable income and the amount taxes owed. While I am all for paying lower taxes, a couple of red flags go up for me about this advice.
First, do you really need the “stuff” you are rushing to buy and are these supplies and inventory going to end up damaged, obsolete and missing by the time they are needed and thus negating any real savings. So much for just in time inventory management when “tax savings” are on the agenda.
The other concern I have as a CFO with a long term view is more strategic. If the goal of the small business owner is to grow the business (and increase profits) over the coming years, than the business is likely to need access to working capital and investment. If your strategy is constantly to keep your income down and minimize your taxes why would Mr. Banker want to loan you money or Mr. Investor invest in your company. Your financials show no signs of making much of a profit or the ability to repay the loan or investment? Try explaining to the banker or investor that you were just spending money to keep the tax bill down. Really I didn’t need them to run the business. Really.
My recommendation would be to have a plan of regular investing in your business throughout the whole year where the opportunity for a reasonable rate of return exists. As one small business owner remarked “I want to be in a position where I have to pay a higher tax rate because that will mean my profits have really gone up”. I would agree with that strategy.