Myth #1 – You can do your accounting yourself
Unless you have an accounting background, I realize some lawyers may have an undergrad in business and might have taken some accounting classes, you really are not qualified to do your own accounting.
Additionally, you shouldn’t be doing it because it’s a waste of your time. There, I said it.
Here’s why…It likely takes you way longer to do than it should and that time could be spent serving your clients or strategizing on your firm goals.
Believe me, folks, you can’t and you shouldn’t.
Myth #2 – You only need to look at your financials at tax time
No, no, and no…
Here’s why:
- You are not able to use that financial data throughout the year to make adjustments and changes in your firm.
- When you wait for tax time, it also is usually a last minute crisis and you have your CPA waiting for you. If your business tax return isn’t done, you are also going to be late on your personal return.
- You will have no idea how much taxes you need to pay and it will be a “surprise”. {not really…you just like to act like it is…}
Yes, yes, and yes…
This is what you should do: look at your financials every month, religiously when you get them from your accountant, and use that information to make decisions about your firm. How you want to move forward, whether you’re meeting your goals or not. Maybe you need to make some cutbacks. Maybe your revenue isn’t where you think it should be. You might need to cut your expenses or maybe you have more revenue than you budgeted for. You may want to make some investments in the firm with that extra revenue.
Don’t wait to look at your financials until tax time.
Myth #3 – You should buy stuff at the end of the year to save money on taxes
There are some ways to strategically increase spending to reduce your tax bill…but generally speaking, I am not an advocate of just spending money to save money on taxes.
Here’s a real life numbers example for you:
Let’s say your CPA said, go spend some money, so you don’t have to pay as much in taxes, and you could use a new copier, but don’t really need one. You buy the new copier for $10,000. If you’re in the 20% tax bracket, you’re saving $2,000, but you’ve spent $10,000. You are out of pocket $8,000 on something you may not have actually needed for your firm.
There are strategies you can use to reduce your tax liability in the current year. One of those would be paying your rent early. Pay it in the last week of December, that’s a valid expense that you are going to have anyway or advertising costs, you may get a discount if you pay six months at a time.
There are some strategies to minimize your tax liability in the current year, but I am not an advocate of just going out and buying something so you can save money on your taxes.
If you really run the numbers, you’re probably going to find it’s really not in your best financial interest.
Myth #4 – The profit that you see on your P&L can be taken out of your firm
Here is why this is a myth:
If you have debt such as credit card payments, loans, or anything along those lines, the principal payments are not reflected in the profit number that you’re seeing on your P&L. That is cash that went out the door and not available for you to pull out of your firm.
The other reason you may not want to pull the profit you see on your P&L from the firm is it may not be in alignment with your other firm financial goals. One of these may be building cash reserves, which I recommend at least three months of operations. If this is a goal, you will want to leave some of that profit in the firm.
Another goal could be to pay down debt, you would want to leave some of the profit for that.
There are several reasons you may want to leave profit in the firm, these are just a couple of examples.
Bottom line (pun intended), having a financial plan for your firm allows you to reach your financial goals, both business and personal.
I would love to chat with you about your financial goals and help you debunk any myths you have! Use the link below to grab a time to chat.
