If you're like most Australian business owners, your tax planning starts just before the end of the financial year.
You probably contact your accountant at most twice per year:
- Once in the months leading up to the end of financial year: to plan for last minute taxation strategies to legitimately minimise or defer how much tax is payable for the financial year.
- To sign off on completed financial statements and tax returns: often more than four months after the end of the year, as a historical review of the 12 months that ended a very long time ago!
Both discussions are necessary. But neither indicate the real health of your business and neither include well-considered, appropriate, or smart strategies to help your business get where it needs to be.
Does this sound familiar? Then keep on reading to find out why a business health check can supplement end-of-year tax planning by answering the real questions that need to be asked.
There are some fundamental questions that your tax planning will not raise.
Some of them are uncomfortable for business owners to address but, without asking them, all you are doing is plugging holes; not really planning for the sustainable growth in profit and long term health of your business.
Have you asked yourself these questions?
- Where does the business need to be by the end of 2022? 2023? 2026?
- Is the business as successful as you'd like?
- If not, how far away from success or maturity is the business?
- Where on the roadmap to success is the business now?
- What should the business do next in order to achieve success?
- What does success mean for this business? Have you defined it?
- Have you taken the steps you need to get there?
The journey starts with a single step. But even before taking that step, you need to determine where you are starting from and where you want to finish up.
The problem with the end of financial year statements that most business rely on is this: they are normally limited to profit and loss, balance sheet, and perhaps statement of movement in cash flows - essentially detailing what was recorded for the previous 12-month period.
They represent the sum total at a particular point in time - just a very brief snapshot of the business. And this snapshot is often distorted by income deferral and bringing forward expenditure, such as superannuation contributions, to achieve a desired tax position.
They ignore many indicators that reveal the true performance of a business, including:
- Trends over three or more financial periods
- Comparison of actual outcomes to forecasts
- Benchmarks against industry figures
- Non-financial indicators such as client satisfaction and lead conversions.
You can't tell the real state of your business by end of financial year statements or basic tax planning with your accountant. While necessary, they do not provide the meaningful information you need to make key strategic business decisions for the future.
For this, your business needs a health check that considers all the types of factors outlined above.
If you look at picture of a crowd and focus only on one small section, you are likely to use this focal point to describe what is going on in the whole picture. But you are not describing the full picture; it is a false impression when so much of the story is missed.
Similarly, tax planning and end of year statements can misrepresent how truly successful a business is or isn't. This misleading diagnosis can lead to the wrong course of action, simply addressing surface issues, or, worse still, ignoring major red flags.
A full and complete business health check should be the starting point if you want to prepare for the future. This will help you understand the position of the business now, along with its strengths, weaknesses, opportunities, and threats.
This then enables the appropriate action to be planned to fix underlying problems and identify easy opportunities for quick improvement. It can also help with longer-term outcomes in alignment with your goals and help you get back on track with why you started the business in the first place.