We begin to improve business performance with an investigation of your practices around cash. Have you been advised to minimize cash in order to minimize tax payments? Have you been focused on the top line-sales revenue but not bottom line profit?
Cash is the single most valuable resource for any company. Cash improves business performance, makes you a solid candidate for outside funding, and increases the value of your company (even if you don’t have plans to exit any time soon.) Cash allows you to invest smartly when opportunities rise.
In this post, we’ll look at the question of taxes.
Tax avoidance reduces cash
The CPA or adviser that counsels reducing cash in order to pay less in taxes has a short term mentality that hurts your company. This is often called ‘tax planning’ which sounds benign, but it is not. It takes cash out of the business which means it’s not there for any of the many valuable uses that require cash. Here’s an illustrative example: You project a profit of $1,000,000. Your CPA advises tax planning that reduces that profit to $500,000. You pay taxes equal to 25%, which leaves your cash balance at $375,000.
If instead your CPA advises that you pay the 25% (or perhaps a bit more) on the full $1,000,000, you’ll have a cash balance of $750,000. That is tangible cash on hand that you can save or invest in myriad ways.
Go for the cash, not for reducing taxes.
Every company needs a qualified and experienced CPA and we work with them for the benefit of our client companies. Please be sure to ask your CPA about their position on taxes and be sure that it serves your long-term goals of growth, expansion, and company value.
We’re eager to receive your questions or comments. Thanks!