Why are we doing this?

A client asked a very sincere question this past week as we finalized his tax return and I let them know about some issues I was seeing in his books for his businesses that he needed to correct. 

He said accounting has caused him a huge headache over the past couple years (he’s a REI with a flipping/wholesale business, and a slew of rentals) - what’s even the point of keeping the books except to prepare a tax return?

The main reason why most business owners need real-time data from their financials is so they can use that information to make immediate, strategic decisions in their business. 

For this individual, I told them this could mean:

• Comparing ‘budgeted to actual’s on flips to see profitability as project progresses.

• Understand tax position throughout the year & make decisions accordingly.

• Analyze what your free cash flow on rentals is. 

• Know how leveraged you are on properties you’re thinking about refi-ing or making improvements on. 

• Use data to project-out the rest of the year’s financials.

• Understand ongoing costs (cost of goods sold and overhead) as a % of gross revenue.

With another client I recently took on, once we got their books up to date, we could easily see one of their divisions was sucking all the cash from the profitable division, and that was due to a bloated payroll, so immediate adjustments could be made to stop the bleeding. 

Every decision you make in a business will always tie back to the finances, so it’s imperative you allow the finances to give you the feedback you need from those decisions.