Anyone familiar with the best selling book The 7 Habits of Highly Successful People can tell you that first habit is to be proactive. What does it mean to be proactive versus reactive? Proactive is planning ahead and addressing problems before they occur and reactive is waiting for a problem to happen and then reacting to fix it. When it comes to your accounting and your business waiting can often mean being too late.
Tax accounting is a study in proactive behavior. As a South Tampa accountant a big part of my job is to stay current with changes in the tax code and to be aware of proposed changes and how they affect my clients. A great deal of what I do is identifying not only potential problems but finding upcoming changes to the tax code that benefit my clients and developing a plan to implement them to their advantage. The same is true with efficient business operations. Look ahead now to save costs and make changes for the future.
Tax planning is when we analyze a client’s financial situation and plan to align our client’s goals with the most efficient tax plan. Tax planning involves the timing of both the purchase and sale of investments and expenses, including retirement plans, adjustments to filing status and deductions. The most important aspect of effective tax planning is being proactive and not letting the tail wag the dog so to speak. As soon as the year is over, there is not much that can be done.
For small business owners the difference between being proactive and reactive can be the difference between success and failure particularly in the accounting practices. Small businesses are particularly vulnerable to small changes in their cash flow and a reactive stance in this regard can prove catastrophic.
Consider the following scenario;
Joe owns a small trophy and awards business and regularly buys 3 months of supplies at a time in advance of his need. Joe doesn’t utilize income forecasting and usually has no problem paying for his C.O.D. order when it arrives 3 weeks later. This time his order arrives and Joe expected to have the cash on hand to pay for the shipment, but because of small changes in the way several of his regular customers order and pay for their orders Joe came up short and had to refuse his shipment.
Joe was using a reactive habit to run his business. He ordered supplies when he his inventory ran low and believed the money to pay for it would be there. Had Joe employed a proactive position in his accounting he would have seen a trend in several of his regular customers of placing more rush orders and no longer taking advantage of his discounted 10 day invoice and paying on a Net 30 day basis.
Joe’s business payment cycle changed and because always reacted to his need for inventory by ordering and reacted to the delivery by paying with cash on hand he came up short and soured a long-standing positive relationship with a supplier and with several customers whose last minute orders he could not fill because he didn’t have the supplies on hand to fill them.