If the recent tax season caused major headaches, it’s natural to want to put the experience behind you as soon as possible.
CPAs are quick to finish straightforward returns and set aside the thick, untidy folders stuffed with problems to tackle when their faculties are sharpest, or once an extension has been filed – whichever comes first.
Meantime, small business owners go to great lengths to avoid filing those extensions; to them, wallowing in the numbers for another few months might mean neglecting other aspects of their work.
But tax time is actually an opportunity to review and improve accounting practices – especially if the filing process has uncovered a mess. Whether you’ve crossed the finish line with a corporate or individual return or filed an extension, it’s worthwhile to pause and analyze the pain points. Resolving tax time problems while the details are still fresh in mind helps the issues get addressed properly – and prevent their re-occurrence next year.
Among the issues that tax filing can uncover:
Irregularities due to incompetent bookkeeping – or worse. Multiple adjustments, over-reliance on journal entries, mismanagement of inventory, or frequent computational errors can all be signs that it’s time to hire a new bookkeeper. Unexpected revenue shortfalls may even be due to fraud, which affects nearly one in three small businesses. You should take advantage of the painstaking scrutiny tax season requires to investigate any gaps in the accounting record, and to consider instituting the internal controls that can both prevent employee fraud and flag bookkeeping errors before they become major problems.
Outdated or outgrown accounting methods. Tax returns can be useful planning tools for businesses, given that they concisely document revenues and costs and their sources. As businesses grow (or slow), routines for documenting financial transactions must adapt; identifying which pieces of information were difficult to track down at tax time and setting up new data gathering routines in response can help business owners ensure that their accounting practices match their business’ needs. New accounting categories, reports, and inventory management practices may also be part of the information overhaul.